Canadian Tax Journal, Vol. 56, No. 3, 2008

canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3, 589 - 638

Performing in Canada: Taxation of Non-Resident Artists, Athletes, and Other Service Providers

Mark Jadd, Norman Bacal, and Kay Leung*

P r é c i s Cet article passe en revue l’état actuel du droit fiscal canadien et des pratiques administratives applicables aux non-résidents qui fournissent des services au Canada et aux entreprises qui retiennent leurs services. On accorde une attention particulière aux règles relatives aux athlètes et aux fournisseurs de services étrangers de l’industrie du divertissement, incluant un aperçu des dispositions particulières qui régissent l’imposition des acteurs non-résidents. Dans l’article on examine la responsabilité fiscale de fond des fournisseurs de services étrangers en vertu du droit canadien et les conséquences que les conventions fiscales peuvent avoir sur cette responsabilité. On aborde plus particulièrement l’impact du 5e protocole à la convention fiscale entre le Canada et les Etats-Unis. Les auteurs examinent la distinction entre employés et entrepreneurs indépendants à même leurs commentaires sur les implications fiscales pour les travailleurs étrangers. Pour terminer, l’article passe en revue les obligations de retenue des personnes qui effectuent des paiements à des fournisseurs de services non- résidents et les allégements administratifs qui sont disponibles dans le cas de retenue excédentaire.

A b s t r a c t This article reviews the current state of Canadian tax law and administrative practice applicable to non-residents who provide services in Canada and to the businesses that engage them. Particular emphasis has been placed on the rules pertaining to foreign athletes and service providers within the entertainment industry, including an overview of the special provisions governing taxation of non-resident actors. The article examines the substantive tax liability for foreign service providers under Canadian domestic law and the effect that tax treaties may have on such liability. In particular, the impact of the fifth protocol to the Canada-us income tax convention is considered. In commenting on the tax implications for foreign workers, the authors examine the distinction between employees and independent contractors. They also review the withholding obligations of

* Of Heenan Blaikie LLP, Toronto. We wish to thank Manon Thivierge, of Heenan Blaikie LLP, Montreal, and Angie Wynn of Heenan Blaikie LLP, Toronto, for their valuable comments and assistance in the preparation of this article. Any errors or omissions remain our responsibility.

589 590 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 persons who make payments to non-resident service providers and the administrative relief available in respect of excessive withholding. Keywords: Artists n athletes n films n non-resident n services n treaty

C o n t e n t s Introduction 591 Legislative Basis for Taxing Non-Residents 592 General Principles 592 Taxation of Actors 594 The Actor Tax 594 Use of Personal Services Corporations 595 Taxation of Other Performing Artists and Professional Athletes 597 Distinction Between Independent Contractors and Employees 598 General Principles 598 Application of Wiebe Door and Sagaz to Performing Artists and Behind-the-Camera Personnel 600 Allocation of Income Between Canada and Other Countries 604 General Principles 605 Allocation of Income for Actors 606 Allocation of Income for Other Performing Artists 608 Allocation of Income for Athletes 609 Treaty-Based Exemptions from Taxation 612 General Principles 612 Treaty Exemptions Generally Available to Independent Contractors 613 Treaty Exemptions for Dependent Personal Services 618 Income Taxes for Employees 618 Social Security and Employment Insurance 620 Treaty Exemptions for Artistes and Athletes 620 Artistes 621 Athletes 621 Use-of-Likeness Payments to Artistes and Athletes 623 Withholding Obligations 623 General Principles 623 Withholding Obligations for Actors 627 Fees for Acting Services 628 Per Diems, Travel Expenses, and Living Expenses 629 Residuals and Participations 629 Withholding Obligations for Athletes and Behind-the-Camera Personnel 631 The 2010 Vancouver Olympic Winter Games 631 Withholding Tax Waivers 632 General Principles 632 Regulation 102 Waivers 633 Treaty-Based Regulation 105 Waivers 634 General Rules for Eligibility 634 Athletes, Actors, and Other Performing Artists 635 Behind-the-Camera Personnel 635 Income and Expense Waivers 637 Conclusion 637 taxation of non-resident artists, athletes, and other service providers n 591

Introduction One of the consequences of the globalization of the marketplace is a steady increase in the number of foreign-owned businesses with operations in Canada. These foreign businesses (most of which are American) operate through a variety of business structures. While many have established Canadian subsidiaries or branches, others have a more tangential connection, carrying on business in Canada through the temporary presence of non-resident employees or subcontractors. The number of international sporting events held in Canada is also on the rise. The National Hockey League (nhl), the National Basketball Association (nba), major league baseball (mlb), major league soccer, and the National Lacrosse League each have at least one franchise located in Canada. In many of these Canadian franchises—notably teams in the NHL, the Toronto Raptors (nba), and the Toronto Blue Jays (mlb)—most, if not all, of the players are non-Canadian. The teams in the Can- adian Football League (cfl) also employ a significant number of foreign players. In addition, there are numerous minor league teams operating in Canada on which foreign nationals play. Outside the sports leagues, many other international sporting events regularly take place in Canada. Automobile racing, tennis, and golf, for example, attract competitors from around the world, as well as Canadian participants. In addition, the 2010 Winter Olympic Games in Vancouver will involve thousands of paid non-residents in organizing and preparing for this event. International performing artists are also coming to Canada with increasing regu- larity. New venues have opened up in metropolitan centres and in smaller cities and towns that are capable of hosting concerts featuring international stars. At the same time, foreign-financed film and television production carried out in Canada (particularly shooting on location by us production companies) has continued at a very high level since its explosive growth in the late 1990s. Foreign service providers and businesses that engage them need to be aware of the Canadian tax implications associated with the performance of services in Canada. Over the past decade, there has been significant administrative, legislative, and judicial activity relating to the taxation of non-residents in respect of services rendered in Canada. Particularly important in the present context is the recent signing of the fifth protocol to the Canada-us income tax convention (1980),1 which, once in

1 The Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed at Washington, DC on September 26, 1980, as amended by the protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, and July 29, 1997 (herein referred to as “the US treaty”); and Protocol Amending the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital Done at Washington on 26 September 1980, as Amended by the Protocols Done on 14 June 1983, 28 March 1984, 17 March 1995 and 29 July 1997, signed at Chelsea, Quebec on September 21, 2007 (herein referred to as “the fifth protocol”). Canada ratified the fifth protocol on December 14, 2007 and the US Senate approved the protocol on September 23, 2008. The fifth protocol will be in force upon the exchange of diplomatic notes between the two countries. 592 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 force, will provide new rules for the availability of treaty-based exemptions for us residents performing services in Canada. This article describes the current state of the law and administrative practice applicable to non-residents who provide services in Canada and to businesses that engage them. While we will review the general principles governing the taxation of non-resident employees and independent contractors, our main focus will be the taxation of athletes, performing artists, and other service providers (behind-the- camera personnel) in the motion picture and television industries.2 A number of factors are taken into account in determining whether and to what extent a non-resident will be taxed in Canada for services rendered here. These factors include the person’s status as an independent contractor or an employee, the existence of a fixed base or permanent establishment in Canada through which the services are provided, the person’s country of residence, and the nature of the services rendered. The discussion that follows examines in detail the impact of each of these factors on the non-resident’s ultimate tax liability, within the framework of domestic and international tax law and practice.

Legislative Ba sis for Ta xing Non-Residents General Principles Income taxation in Canada is based on residence. Under the Income Tax Act,3 individuals and corporations that are “resident” in Canada are subject to income tax on their worldwide income from all sources. Non-residents are subject to Canadian income tax only in respect of their income from specific sources. In particular, a non-resident person will be subject to tax under part i of the ita only to the extent that the person has been employed in Canada, carried on a business in Canada, or disposed of taxable Canadian property.4 In such case, the non-resident will be required to pay Canadian income tax on his or her “taxable income earned in Canada for a taxation year.”5 A non-resident may also be subject to tax under part xiii of the ita6 in respect of certain payments received from a person resident in Canada,

2 The application of withholding taxes to non-residents engaged in the film and television industry was also the focus of a 1986 article by Norman Bacal and Richard Lewin, “The Taxation in Canada of Nonresident Performing Artists and Behind-the-Camera Personnel” (1986) vol. 34, no. 6 Canadian Tax Journal 1287-1330. 3 RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as “the ITA”). Unless otherwise stated, statutory references in this article are to the ITA. The tax consequences under the Quebec Taxation Act, RSQ, c. I-3 (herein referred to as “the TAQ”) for non-resident persons who are employed or carrying on a business in Quebec are substantially the same as those discussed under the ITA, except as otherwise noted. 4 Subsection 2(3). 5 Subsection 115(1). 6 There is no equivalent to part XIII under the TAQ. taxation of non-resident artists, athletes, and other service providers n 593 including management fees,7 interest,8 royalties,9 and certain compensation paid to actors.10 However, any such tax liability may be reduced or eliminated through the application of a relevant income tax treaty.11 Consequently, the determination of a person’s residence for tax purposes is crucial to the quantification of that person’s liability for Canadian taxes. A detailed review of the rules for determining a person’s residence is beyond the scope of this article.12 Accordingly, our commentary is limited to the Canadian tax implications affecting those persons who have been determined to be non-residents of Canada for the purposes of the ita. Once it has been determined that a non-resident is subject to tax under part i of the ita, it is necessary to quantify the amount of the person’s taxable income that is considered to be earned in Canada. For the purposes of this article, the relevant components of this calculation are found in subparagraphs 115(1)(a)(i) and (ii).13 These provisions require the non-resident to include, in computing taxable income earned in Canada, all “incomes from the duties of offices and employments performed by the non-resident person in Canada”14 and all “incomes from businesses carried on by the non-resident person in Canada.”15 If the non-resident is earning income as an employee, subparagraph 115(1)(a)(i) will apply, whereas if the non-resident is considered to be an independent contractor, then subparagraph 115(1)(a)(ii) will apply. The conclusion as to whether a particular non-resident is rendering services as an employee or as an independent contractor is also relevant in analyzing whether a tax exemption is available under a relevant treaty, as well as determining the withholding obligations of the party paying for the services. The distinction between an employee and an independent contractor is discussed below.

7 Paragraph 212(1)(a). 8 Paragraph 212(1)(b). 9 Paragraph 212(1)(d). 10 Section 216.1. 11 The treaty principles governing the taxation of non-residents are discussed below. 12 For discussion of the determination of residence, see, for example, Paul Lefebvre, “Canada’s Jurisdiction To Tax: Residency and the Thomson Decision 60 Years Later,” Personal Tax Planning feature (2006) vol. 54, no. 3 Canadian Tax Journal 762-80; and Edwin G. Kroft, “Jurisdiction To Tax: An Update,” in Tax Planning for Canada-US and International Transactions, 1993 Corporate Management Tax Conference (Toronto: Canadian Tax Foundation, 1994), 1:1-138. 13 Section 1089(b) of the TAQ taxes “income from businesses carried on by [a non-resident person] in Canada that is attributable, in prescribed manner, to an establishment in Québec” (emphasis added). Therefore, a non-resident independent contractor is subject to tax in Quebec only if he has an establishment in Quebec. For the purposes of certain provisions in the TAQ, if a non-resident person is resident or deemed resident in a country with which Canada has entered into a tax treaty and such treaty contains a definition of “permanent establishment,” the word “establishment” in the TAQ has the meaning assigned by that treaty. 14 Subparagraph 115(1)(a)(i). 15 Subparagraph 115(1)(a)(ii). 594 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

Taxation of Actors Until recently, the ita did not distinguish between acting services and any other type of services performed in Canada.16 Historically, actors were required to compute their income in accordance with the general principles outlined above. However, in contrast to the tax treatment of other service providers, most of Canada’s tax treaties negotiated over the past 25 years provide for only limited relief from Canadian taxation in respect of acting services rendered in Canada by foreign actors.17 For example, under the current us treaty, American actors, other performing artists, and athletes are excluded from claiming treaty relief that was available to them under the 1942 treaty18 and that remains available to other service providers.19 While non-resident actors working in Canada were required to file income tax returns and report income earned under section 115 of the ita, they rarely complied with that requirement, and the Canadian tax authorities rarely enforced the obligation.20 Both the actors and the Canadian government appeared to be satisfied with the remittance of a source deduction of 15 percent pursuant to regulation 105 of the Income Tax Regulations.21 However, with many foreign actors on television series maintaining a regular and recurring presence in Canada, this unofficial policy of disregarding Canadian tax-reporting obligations became untenable. Rumours that the Canadian government would begin demanding that American actors file Canad- ian tax returns threatened to scare off those actors from working in Canada, thereby dealing a potentially critical blow to the Canadian film and television production industry.

The Actor Tax With the rapid increase in Canadian film production in the late 1990s, the Department of Finance finally intervened to negotiate a solution. After numerous consultations among the Department of Finance, the Canada Revenue Agency (cra), representa- tives of the Canadian film production industry, and us film studios, a compromise was reached, and legislative changes were enacted in 2001. The solution was to amend

16 The TAQ still does not make this distinction. 17 As discussed below, limited relief is similarly afforded to athletes and other performing artists. 18 Convention and Protocol Between the United States and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in the Case of Income Taxes, signed on March 4, 1942, as amended (herein referred to as “the 1942 treaty”). The current US treaty came into force on August 16, 1984, effective, in respect of taxes other than withholding taxes, for taxation years beginning on or after January 1, 1985. However, by virtue of article XXX(5) of the treaty, provisions of the 1942 treaty that had provided greater relief to a taxpayer continued in force for an additional taxation year. 19 US treaty articles XIV (Independent Personal Services), XV (Dependent Personal Services), and XVI (Artistes and Athletes). These treaty provisions are discussed in further detail below. 20 Canada, Report of the Auditor General of Canada to the House of Commons 2001 (Ottawa: Office of the Auditor General of Canada, December 2001), chapter 7. 21 CRC 1978, c. 945, as amended. taxation of non-resident artists, athletes, and other service providers n 595 part xiii of the ita to provide a full and non-refundable withholding tax in respect of gross income earned by a non-resident actor from services performed in Canada (“the actor tax”),22 as an alternative to the general rules for reporting such income. Specifically, subsection 212(5.1) was added to impose a 23 percent withholding tax for amounts paid or credited after 2000 for acting services provided by a non-resident actor or by a corporation related to the actor:

212(5.1) Notwithstanding any regulation made under paragraph 214(13)(c), every person who is either a non-resident individual who is an actor or that is a corporation related to such an individual shall pay an income tax of 23% on every amount paid or credited, or provided as a benefit, to or on behalf of the person for the provision in Canada of the acting services of the actor in a film or video production.

By virtue of a further amendment in subsection 115(2.1), any amount that is subject to tax under subsection 212(5.1) is not included in the actor’s taxable income earned in Canada and thus is excluded from tax under part i of the ita. Consequently, provided that the non-resident actor has no other part i income, he or she generally will not be under any obligation to file a Canadian income tax return.23 If the non-resident actor determines that the tax on net income under part i of the ita would be less than 23 percent of the gross remuneration and not otherwise creditable for foreign tax purposes, the actor can elect out of the actor tax. Specific- ally, subsection 216.1(1) allows the non-resident actor to file a Canadian part i tax return by the filing-due date,24 electing to be subject to part i taxation rather than the actor tax under part xiii. Where such an election is made, any amount withheld under subsection 212(5.1) will be considered to have been paid on account of the actor’s ultimate part i tax liability.25 Furthermore, subsection 115(2.1) will not be applicable; consequently, the acting income (to the extent that it relates to the performance of services in Canada) will be considered to be taxable income earned in Canada by the actor.

Use of Personal Services Corporations It is standard practice for American actors to provide their acting services through a personal services corporation, referred to as a “loan-out” company. In this way, actors are able to make generous contributions to their pension plans, which will be deductible for us tax purposes. Generally, the loan-out company pays a salary to the

22 The TAQ does not contain any provisions analogous to the actor tax. Thus, a foreign actor providing services in Quebec will not be subject to tax under the TAQ unless he or she has an establishment in Quebec. 23 Subsection 150(1.1). 24 “Filing-due date” is defined in subsection 248(1) as “the day on or before which the taxpayer’s return of income under Part I for the year is required to be filed or would be required to be filed if tax under that Part were payable by the taxpayer for the year.” 25 Subsection 216.1(2). 596 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 actor so that the company’s net income after deducting all other tax-deductible expenses (for example, agent’s commissions, manager’s fees, and legal fees) is nil. However, the use of a loan-out company creates the possibility of double taxation. A loan-out company is generally not taxable in the United States (since its net income is generally nil); consequently, it cannot take advantage of any foreign tax credits in respect of taxes paid by it in Canada. Furthermore, since actors performing services in Canada through a loan-out company historically have not paid Canadian income tax (generally, only the source deductions in respect of payments to the loan-out company are remitted to the Canadian tax authorities), they have not been able to claim a tax credit against us tax on the salaries received from the loan-out company. This problem is obviated, when possible, by either using a us fiscally transparent entity (such as a qualified subchapter s corporation) as the loan-out company, or having the actor personally enter into the contract for the provision of Canadian services. The latter arrangement has sometimes resulted in an odd situation for Canadian productions, where rehearsal services in the United States or acting services outside Canada are provided by the actor through the loan-out company while Canadian acting services are provided by the actor personally, under separate contracts. The use of loan-out companies has also created the potential for double taxation under the actor tax provisions, since both the loan-out company and the individual actor could be subject to Canadian tax. Subsection 212(5.2) was designed to deal with this issue; it reads as follows:

212(5.2) Where a corporation is liable to tax under subsection (5.1) in respect of an amount for acting services of an actor (in this subsection referred to as the “corporation payment”) and the corporation pays, credits or provides as a benefit to the actor an amount for those acting services (in this subsection referred to as the “actor payment”), no tax is payable under subsection (5.1) with respect to the actor payment except to the extent that it exceeds the corporation payment.

Consequently, salaries paid by the loan-out company to the actor for Canadian acting services are exempt from withholding tax under subsection 212(5.1) provided that they do not exceed the amount of the payment received by the loan-out company in respect of such services. Subsection 216.1(3) is an anti-avoidance provision that ensures consistency between the approaches applied by the loan-out company and the actor. Specifically, if the loan-out company elects out of the actor tax and is therefore subject to part i taxation, the actor is deemed to have also elected to be subject to part i taxation on the salary received from the loan-out company. This ensures that if the loan-out company files a nil Canadian part i return (as a result of paying out the income as salary to the actor), the actor is required to file a part i return to report the employment income. Another anti-avoidance provision is contained in subsection 115(2.2). This provision clarifies that a loan-out company that has paid part xiii tax in respect of income from acting services cannot deduct salaries paid in a subsequent year in respect of taxation of non-resident artists, athletes, and other service providers n 597 such services in computing its part i income for any taxation year. The salaries are also not included in the actor’s taxable income earned in Canada for that subsequent year.

Taxation of Other Performing Artists and Professional Athletes Unlike non-resident actors, who are subject to specifically targeted rules, other performing artists and professional athletes are subject to Canadian taxation under the general principles applicable to other service providers. Non-resident athletes who are employed by a professional sports team will be taxed under subparagraph 115(1)(a)(i), while independent contractors such as professional golfers will be taxed under subparagraph 115(1)(a)(ii). Non-resident performing artists (other than actors) will generally be considered to be independent contractors subject to subparagraph 115(1)(a)(ii). Athletes employed by professional sports clubs must include in their employment income earned in Canada all salaries (including income from personal services contracts), all performance-related bonuses, and fees for promotional services performed for the benefit of the club to the extent that such wages and fees pertain to services rendered in Canada.26 In addition, paragraph 115(2)(c.1) requires an athlete to include in his or her taxable income earned in Canada any signing bonuses received in consideration for entering into an employment contract or an agreement to perform services in Canada to the extent that the bonus is deductible in computing the income of a Canadian taxpayer. However, the cra has taken the administrative position that paragraph 115(2)(c.1) applies only to the portion of the signing bonus that can reasonably be considered to be attributable to services performed in Canada.27 As discussed above in connection with actors, it is often advantageous for other performing artists and athletes to provide their services through a loan-out company. The loan-out company may be established as either a Canadian or a foreign corporation.28 Where the company is a non-resident of Canada, it will be subject to income tax in Canada on the fees earned from the services rendered in Canada.29 In addition, the athlete or performing artist will be subject to Canadian income tax in respect of any wages or fees received from the loan-out company that are attributable to services rendered in Canada.30 Unlike the situation for actors, the ita does

26 Interpretation Bulletin IT-168R3, “Athletes and Players Employed by Football, Hockey and Similar Clubs,” May 13, 1991, paragraph 1. The allocation of the athlete’s income between Canada and other countries in which services are provided is discussed below. 27 CRA document no. 9819311, August 11, 1998. 28 US loan-out companies are generally established as S corporations, for the reasons discussed above in relation to American actors. 29 Subparagraph 115(1)(a)(ii). 30 Paragraph 115(1)(a). Depending on the legal nature of the relationship between the individual and the loan-out company—that is, employee or independent contractor—subparagraph 115(1)(a)(i) or (ii) will apply. 598 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 not contain a mechanism to exclude payments received from the loan-out company from part i taxation.31

Distinction Bet ween Independent Contr ac tors and Employees The ita taxes non-residents of Canada on employment income and business income earned in Canada. The categorization of a particular arrangement is relevant to ascertaining the withholding obligation of the person who hired the non-resident and the availability of deductions and treaty exemptions to the non-resident service provider. There is a large body of jurisprudence on the determination of a worker’s status. This jurisprudence has been extensively reviewed in prior articles.32 Rather than repeating that analysis, this article summarizes the principles arising from the leading cases and canvasses the new jurisprudential trends in this area. The application of these principles to athletes, performing artists, and film crews (otherwise referred to as “behind-the-camera personnel”) will be specifically examined.

General Principles The leading Canadian income tax case on whether a worker is an employee or an independent contractor is the Federal Court of Appeal decision in Wiebe Door Ser- vices Ltd. v. mnr.33 Relying on the Privy Council decision in Montreal v. Montreal Locomotive Works,34 the Court of Appeal adopted a four-part test to determine the status of a worker. The four elements considered by the court were

1. the degree or absence of control exercised by the employer, 2. ownership of tools, 3. chance of profit, and 4. risk of loss.

31 As discussed above, such payments to actors are excluded pursuant to subsection 212(5.2). 32 See, for example, Alain Gaucher, “A Worker’s Status as Employee or Independent Contractor,” in Report of Proceedings of the Fifty-First Tax Conference, 1999 Conference Report (Toronto: Canadian Tax Foundation, 2000), 33:1-98; Joanne Magee, “Personal Services Businesses,” Personal Tax Planning feature (2007) vol. 55, no. 1 Canadian Tax Journal 160-83; Lara Friedlander, “What Has Tort Law Got To Do with It? Distinguishing Between Employees and Independent Contractors in the Federal Income Tax, Employment Insurance, and Canada Pension Plan Contexts” (2003) vol. 51, no. 4 Canadian Tax Journal 1467-1519; Philip Friedlan, “Employee Versus Independent Contractor Versus Personal Service Corporation,” in 1997 Ontario Tax Conference (Toronto: Canadian Tax Foundation, 1997), tab 13; Timothy W. Clarke, “The Employee/Independent Contractor Conundrum,” in 2004 British Columbia Tax Conference (Toronto: Canadian Tax Foundation, 2004), tab 10; and Jehad Haymour and J. Scott Bodie, “Employment-Related Tax Litigation—Tips and Traps,” in 1999 Prairie Provinces Tax Conference (Toronto: Canadian Tax Foundation, 1999), tab 6. 33 87 DTC 5025 (FCA). 34 [1947] 1 DLR 161 (PC). taxation of non-resident artists, athletes, and other service providers n 599

The Federal Court of Appeal’s decision in Wiebe Door has been cited and relied upon in numerous decisions dealing with the issue of whether a worker is an independent contractor or an employee.35 The Supreme Court refined the four-part test in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc.,36 holding that the four factors constitute a non-exhaustive list and the relative weight of any particular factor will depend on the facts and circumstances of the case. The court indicated that no single conclusive test can be universally applied to determine whether a person is an employee or an independent contractor; rather, the task is to weigh all factors relevant to the nature of the relationship between the parties and to determine the prevailing character of that relationship. According to the Supreme Court, the test boils down to one central question: “Whose business is it?”37 While the court did not set out a particular test or specify the factors to be applied in determining a worker’s classification, it reiterated that “what must always occur is a search for the total relationship of the parties.”38 The cra has revised its publication “Employee or Self-Employed?”39 to reflect the approach adopted by the Supreme Court in Sagaz. Recent jurisprudence has added a new twist to the analysis by focusing more attention on the parties’ stated intention. In this regard, it has been a common practice for tax practitioners to advise their clients to enter into a written agreement setting out the parties’ intent prior to entering into a relationship, in order to avoid any misunderstanding. In the past, the courts have considered the contractual intent between the parties to be a relevant factor, but they have held that it is not conclusive. Several recent decisions show a departure from this approach. In Combined Insurance Company of America v. Canada (National Revenue), the Federal Court of Appeal ar- ticulated that the relevant facts, including the parties’ intent regarding the nature of their contractual relationship, must be looked at in light of the factors in Wiebe

35 Where a worker provides services in Quebec, the relationship between the worker and a hirer should be considered in light of the Civil Code of Québec, SQ 1991, c. 64, as amended, which sets out the elements of a “contract of employment” (articles 2085 and 2086) and a “contract for services” (articles 2098 and 2099). There are two schools of thought regarding the appropriate test for determining the relationship between a hirer and a worker in Quebec. One school of thought takes the position that in Quebec the four-part test in Wiebe Door does not apply and the only element considered in an employer-employee relationship is the element of control: see Vaillancourt v. MNR, 2005 TCC 328; and Pierre Archambault, “Contrat de travail: Pourquoi Wiebe Door Services Ltd. ne s’applique pas au Québec et par quoi on doit le remplacer,” in L’Harmonisation de la législation fédérale avec le droit civil québécois et le bijuridisme canadien: deuxième recueil d’études en fiscalité (Montréal: Association de planification fiscale et financière, 2005), 2:1. In determining whether control exists, Quebec courts have examined a number of indicia of control: see Lévesque v. MNR, 2005 TCC 248. The second school of thought holds that the four-part test established under common law is equally applicable in Quebec: see 97980 Canada Inc. v. Québec (Sous-ministre du Revenu), JQ no. 995. 36 [2001] 2 SCR 983. 37 Ibid., at paragraph 50. 38 Ibid., at paragraph 46. 39 Canada Revenue Agency guide RC4110(E), “Employee or Self-Employed?” 600 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

Door.40 The Federal Court of Appeal’s decision in Combined Insurance follows a new line of cases, such as Wolf v. The Queen,41 Le Livreur Plus Inc. v. Canada (National Revenue),42 sara Consulting & Promotions Inc. v. mnr,43 and Precision Gutters Ltd. v. Canada (National Revenue).44 In these cases, the courts have recognized that “in the absence of clear and credible evidence that the description of a relationship is other than as agreed between arm’s length parties, the description agreed upon by those parties must stand.”45 These decisions are a welcome departure from previous judgments because they acknowledge that taxpayers are entitled to arrange their own affairs. Once an agreement has been reached, the taxpayers can summarize their arrangement and relationship in writing, and that documentation will be accepted by a court, provided that the nomenclature accurately reflects, and is not meant to dis- guise, the true nature of the relationship. It is important to note that these judgments were rendered after the Supreme Court’s decision in Shell Canada Limited v. The Queen et al.,46 in which the court adopted the “plain meaning” approach to the interpretation of tax statutes. Under this approach, courts must respect and give effect to the actual legal transactions carried out by the taxpayer and not look behind the transactions for the “true economic realities” or the bona fide purpose. In sara Consulting, the Tax Court of Canada agreed that, absent a sham, window-dressing, or an express statutory provision to the contrary, the written agreement between the hirer and the worker must be respected. To sum up the general principles established by the courts in determining the status of a worker, the relevant factors, including the parties’ intention regarding the nature of their contractual relationship, must be looked at not only in light of the degree of control, ownership of tools, chance of profit, risk of loss, and integration, but also in light of any other factor that may prove to be relevant in the particular circumstances of the case. There is no predetermined way of applying the relevant factors, and their importance will depend on the circumstances and the particular facts of the case.

Application of Wiebe Door and Sagaz to Performing Artists and Behind-the-Camera Personnel The determination of whether a worker is an employee or independent contractor is particularly relevant to non-resident performing artists and behind-the-camera

40 2007 FCA 60, at paragraph 35. 41 2002 DTC 6853 (FCA). 42 2004 FCA 68. 43 2001 TCC 2000-3982 (EI) and 2000-3984 (CPP). 44 2002 FCA 207. 45 SARA Consulting, supra note 43, at paragraph 92. 46 99 DTC 5669 (SCC). taxation of non-resident artists, athletes, and other service providers n 601 personnel. For these individuals, the classification may determine the availability of a treaty-based exemption from Canadian tax. The courts have been asked to make the determination generally in a pure Canadian context, but their analyses in respect of these specialized workers are informative in determining the status of non-resident workers. In this section, we provide examples of cases in which the courts have given weight or consideration to one or more of the Wiebe Door/Sagaz factors. In The Royal Winnipeg Ballet v. mnr,47 the Federal Court of Appeal overturned a decision of the Tax Court of Canada that held that dancers engaged by the Royal Winnipeg Ballet (“rwb”) were employees rather than independent contractors for the purposes of the Canada Pension Plan and the Employment Insurance Act.48 The majority of the Federal Court of Appeal held that the intention of the parties with respect to the status of the dancers must be considered. The uncontradicted evidence was that the parties shared a common understanding that the dancers were self-employed and were not employees of the rwb. The court stated that the facts must be examined as to whether, on balance, they were consistent with the parties’ intention. In looking at the particular facts, the majority of the court concluded that the element of control that the rwb exercised over the dancers was not such that it created an employer-employee relationship. Rather, the dancers were considered to be independent contractors. According to the reasons of Sharlow ja,

[t]he control factor in this case, as in most cases, requires particular attention. It seems to me that while the degree of control exercised by the rwb over the work is extensive, it is no more than is needed to stage a series of ballets over a well planned season of performances. If the rwb were to stage a ballet using guest artists in all principal roles, the rwb’s control over the guest artists would be the same as if each role were performed by a dancer engaged for the season. If it is accepted (as it must be), that a guest artist may accept a role with the rwb without becoming its employee, then the element of control must be consistent with the guest artist being an independent contractor. Therefore, the elements of control in this case cannot reasonably be considered to be inconsistent with the parties’ understanding that the dancers were independent contractors.49

A similar analysis of the impact of control in the context of performing artists was used by the Federal Court on an application for judicial review in Dupuis v. cra.50 Mr. Dupuis worked as a guest artist for Cirque du soleil. He contested Cirque du Soleil’s decision to consider him an employee and requested that the cra

47 2006 DTC 6323 (FCA). 48 Canada Pension Plan, RSC 1985, c. C-8, as amended; Employment Insurance Act, SC 1996, c. 23, as amended. 49 Supra note 47, at paragraph 66. 50 2007 DTC 5106 (FC). This decision was rendered before the Federal Court of Appeal decision in Royal Winnipeg Ballet. 602 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 make adjustments in respect of the income tax withholdings made by Cirque du Soleil. The court ordered the cra to consider the requested adjustments on the basis of the applicant’s specific situation and the applicable criteria for distinguishing a performing artist who is an employee from an artist who is an independent contract or. In the reasons for the decision, Martineau j made the following comment on the control test:

However, the fact must be underlined that in the field of the performing arts, certain traditional indicia of control do not always allow a distinction to be drawn between an employee and an independent contractor. For example, decisions concerning rehearsals, the number of shows given during one season and the dates, the costumes worn, the choice and replacement of artists for a collective performance will most probably always be made by the art company, whether it is ballet, opera or theatre. As underlined by Mr. Justice Campbell J. Miller of the Tax Court of Canada in Royal Winnipeg Ballet v. Canada (Minister of National Revenue), 2004 tcc 390 at paragraph 33, 35 c.c.e.l. (3d) 101, dockets 2003-2569(ei) and 2003-2580 (cpp), on appeal: appeal docket a-443-04 (judgment reserved): To rely on those factors to find an employment arrangement, would effectively preclude any possibility of an independent contractor arrangement in a performing arts setting. I find that these type of factors do not assist in drawing a distinction between an employee and an independent contractor in the performing arts environment. Only those factors where there is room to maneuver to a position of more or less control should be assessed.51

In Productions Petit Bonhomme Inc. v. mnr,52 the Tax Court of Canada examined the status of camera operators, sound recordists, switchers, unit managers, makeup artists, electricians, directors of photography, and video recorder operators who were engaged to provide services in connection with the production of a television program. In concluding that each of these workers was an independent contractor, the court remarked that in the television program production industry, “the finished product will be the result of the talent, know-how and creativity contributed by each person at each stage of production.”53 According to the court,

each person’s involvement in the production of the programs in question support the conclusion that a production of this type is the result of the ideas, talent, creativity, and know-how brought by all to the performance of their respective duties, which they carry out under the control of the producer in terms of how their work is to be done. Everything takes place in an atmosphere of collaboration among professionals. Thus, the situation of the workers in these appeals is more like that of self-employed workers.54

51 Dupuis, supra note 50, at paragraph 12. 52 2002 TCC 2000-3683 (EI) (aff’d. 2004 FCA 54). 53 Ibid., at paragraph 95. 54 Ibid., at paragraph 104. taxation of non-resident artists, athletes, and other service providers n 603

In Big Pond Publishing and Production Ltd. et al. v. mnr,55 the Tax Court of Canada examined the relationship between Big Pond, the company that handled the administration of the musical career of Rita MacNeil, a well-known Canadian entertainer, and the members of her band. The relationship between the parties was governed by a contract that provided that the nature of the relationship was one of hirer-independent contractor. The musicians were paid a monthly fee plus additional daily fees if they worked more than 100 days in any particular year. The musicians were reimbursed for their airfare, hotel, and accommodations, were paid a per diem amount for expenses while travelling, and received medical and dental benefits. The musicians provided their own instruments, but Big Pond provided much of the amplification equipment. The evidence before the court indicated that the musicians were professional musicians. Many of them had played for Big Pond for a number of years. A few musicians also performed services for others. With respect to the control issue, the court held that although there was control over what music the musicians played and when, there was no control as to how those instruments were played, and thus the control test would indicate a relationship of hirer-independent contractor. With respect to the integration test, the court recognized that from Big Pond’s point of view, the musicians were an integral part of the shows; without them the entertainer had no band and no music. However, from the musicians’ point of view, they were not integrated into Big Pond’s business. While a substantial part of their income in the period was derived from this source, they clearly had opportunities to avail themselves, and did avail themselves, of other sources of income. In the court’s view, this also supported the finding that the musicians were independent contractors. The cra has published its position on determining the status of a working artist. In Interpretation Bulletin it-525r “Performing Artists,” the cra acknowledges that the determination of an artist’s status is difficult:

When dealing with persons of particular skills and expertise, such as artists, supervi- sion and control of the manner in which the work is done may not be a critical and decisive factor. However, the determination of whether or not an artist is under a contract of service or a contract for services is a question of fact, and will depend on the nature and the terms of the contract or arrangement (written or oral), its duration, and all the elements that constitute the relationship between the parties.56

The cra lists the following factors as indicia of an employment relationship:

(a) the right to decide on or change the size of the group with which the artist performs; (b) the right to choose the nature of the artist’s performance (opera, ballet, theatre, films, musicals, concerts, classical, popular, jazz) without obtaining the artist’s agreement;

55 [1998] TCJ no. 935. 56 Interpretation Bulletin IT-525R (Consolidated), “Performing Artists,” paragraph 4. 604 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

(c) the continuing authority to dictate the time and place of the artist’s perform ance including rehearsals, again, without obtaining the artist’s agreement; (d) the unilateral right to change the dates, times, and places from those ordinarily scheduled, or increase the number of rehearsals or performances; (e) the obligation to pay overtime; or (f ) the responsibility to provide or authorize transportation for the artist.57

In contrast, the cra would consider an artist to be an independent contractor where the artist

(a) has a chance of profit or risk of loss; (b) provides instruments and other equipment; (c) has a number of engagements with different persons during the course of a year; (d) regularly auditions or makes application for engagements; (e) retains the services of an agent on a continuing basis; (f ) can select or hire employees or helpers, fix their salary, direct them or dismiss them; (g) can arrange the time, place, and nature of performances; or (h) is entitled to remuneration that is directly related to particular rehearsals and performances.58

In summary, there is no single factor that is determinative of a relationship of employee or independent contractor. Instead, the entire nature of the relationship between the parties must be examined, as directed by the Supreme Court of Canada in the Sagaz decision. Recent case law illustrates the importance of the parties’ intention at the time they entered into the relationship. This new trend confirms the practice of many practitioners who advise clients to conclude a written agreement prior to entering into a relationship as hirer or worker.

Alloc ation of Income Bet ween c Anada and Other Countries As previously mentioned, non-resident service providers will be taxed in Canada on their income only to the extent that the income was earned in Canada. While this amount may be readily determinable where the provider renders services to the particular recipient exclusively in Canada, it is more challenging to ascertain the amount where services are rendered partially in Canada and partially in another country. For example, an American employee of a us company may be transferred to Canada for a short period of time to assist the company’s Canadian subsidiary, or a professional athlete may be a member of a team that plays some of its games in Canada and some in the United States. In both cases, the individual will have to

57 Ibid., at paragraph 6. 58 Ibid., at paragraph 7. taxation of non-resident artists, athletes, and other service providers n 605 allocate income between the two countries. Even actors who perform in movies that are filmed entirely in Canada regularly allocate a portion of the acting fees to the United States, where ancillary services such as promotion and rehearsal are generally carried out.

General Principles Where a person is employed or carries on business in more than one jurisdiction, the person is required to compute income in respect of a particular jurisdiction on the following assumptions:59

1. the person had no income or loss other than the income or loss from the part of the business that was carried on in the jurisdiction, or from the duties performed in the particular jurisdiction; and 2. the person was allowed only those deductions that were wholly applicable to such part of the business, or to such duties.

For a non-resident employee whose salary is not delineated between Canadian and foreign services, the allocation is generally done on a per diem basis such that the taxpayer need only include income for the percentage of days worked in Canada.60 There are exceptions to the per diem rule. For example, where a non-resident is employed in international transportation, kilometres travelled in Canada and abroad may be a better measure;61 or where a sales employee earns commission income, the particular commission should be allocated to the country in which the effort was expended to earn it.62 Non-resident independent contractors must determine the amount of income that is attributable to “businesses carried on by the non-resident person in Canada.”63 Since this phrase is not specifically defined in the ita,64 the meaning must be determined by reference to the jurisprudence.65 The factors considered in any particular case will vary depending on the type of business activities conducted by the non- resident. In Cutlers Guild Ltd. v. The Queen, the Federal Court listed the various tests that apply when determining whether a taxpayer carries on a business in Canada:

59 Section 4 of the ITA. 60 Interpretation Bulletin IT-420R3, “Non-Residents—Income Earned in Canada,” March 30, 1992, paragraph 7. 61 Ibid. 62 Interpretation Bulletin IT-270R3, “Foreign Tax Credit,” November 25, 2004, paragraph 25. 63 Subparagraph 115(1)(a)(ii). 64 However, section 253 does provide for an extended meaning of the phrase by deeming certain activities to constitute carrying on business in Canada. 65 For a comprehensive discussion, see Constantine A. Kyres, “Carrying On Business in Canada” (1995) vol. 43, no. 5 Canadian Tax Journal 1629-71. 606 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

Whether or not a taxpayer is carrying on a business in another country is a question of fact to be determined in each case. Courts have ruled that the place where sales, or contracts of sale, are effected is of substantial importance. However, the place of sale may not be the determining factor if there are other circumstances present that out- weigh its importance. Another test emanating from the jurisprudence is “Where do the operations take place from which the profits arise?” Soliciting orders in one country may only be ancillary to the exercise of a trade in another country. Certain authorities establish that activities and operations other than contracts for sale constitute the carrying on of a business, especially where these respective activities and operations produce or earn income. While income may be realized through sales, it may not arise entirely from that one activity or operation. Purchasing of merchandise in one country (i.e. Japan) with the view of trading in it elsewhere (Canada) does not, of course, constitute an exercise of the trade in the former country.66

Accordingly, in order to carry on business in Canada, there must be operations or activities in Canada from which business profits arise (or are expected to arise). The cra has provided some guidance on how it determines the location of the source of business income.67 Not surprisingly, where the business consists of the rendering of services, the income will be considered to have arisen in the location where the services were performed.68

Allocation of Income for Actors Actors generally perform multiple functions in connection with the production of a film. Clearly, the most important service that a film actor renders is the performance during principal photography. However, even where all principal photography is performed in Canada, it is likely that the actor will render significant services in the United States or in a third country. For example, lead actors are generally required to promote a film prior to its release by conducting a multitude of local market in- terviews as well as appearing on talk shows broadcast over national networks. The actor is also generally required to report for rehearsals long before filming occurs. In addition, the actor may be required during post-production to perform “loop- ing” (which is essentially a retaping of certain dialogue that was not captured clearly during principal photography). Where the actor is paid a lump-sum amount for all services to be rendered in connection with the film (excluding contingent compensation based on film revenues), he or she will need to allocate the income between the services rendered in Canada (generally principal photography) and all other services rendered. During the past decade, agents for Hollywood actors became quite aggressive in allocating income to the United States. It was not uncommon for actors to take the

66 81 DTC 5093, at 5095 (FCTD). 67 IT-420R3, supra note 60. 68 Ibid., at paragraph 23. taxation of non-resident artists, athletes, and other service providers n 607 position that 50 percent or more of the income from a production filmed entirely in Canada should be allocated to the United States. Furthermore, agents began requiring that production companies enter into “bifurcated” agreements with their clients—an agreement covering Canadian services and a separate agreement covering us services. Each agreement included a specified fee for the particular services covered by the particular agreement, thereby potentially sidestepping the “allocation” issue. The insistence on a relatively large fee in the us agreement, compared with the required services under the respective agreements, created difficulties for the production companies, which were liable for any shortfall in withholding taxes if it was determined that a larger portion of the overall fee paid to the actor should have been allocated to the Canadian agreement.69 The cra became aware of the aggressive allocation approaches being used by some Hollywood actors. Consequently, the Film Services Unit of the cra issued a memorandum setting forth what it considers to be the only acceptable method of allocating income earned by actors between Canada and another country.70 The formula first requires the computation of the number of days that the actor was physically in Canada during the production, whether or not services were rendered on such days. “In Canada” days include the days of arrival in and departure from Canada, weekends, statutory holidays, and days when the actor was on standby, on call, or on short breaks if the actor remained at or near the set. The next step is to compute the number of days spent working on the production “outside Canada.” This is equal to the number of days that the actor actually provided services outside Canada multiplied by 7⁄5 (to take into account weekends). The percentage of the total remuneration paid to the actor for services rendered on the production that is to be allocated to Canada is equal to

“In Canada” days × 100%. “In Canada” days + “outside Canada” days

While the cra has not specified what types of services may be included in computing the “outside Canada” days, the rule of thumb is that for a production filmed entirely in Canada, the portion of the actor’s income allocated to Canada should represent at least 70 percent of his or her total remuneration. In addition to fees for services, all actors are entitled to residuals; in addition, in some circumstances, actors are entitled to participations. Residuals are contingent payments based on repeat broadcasts of a film, program, or commercial after the initial broadcast has aired. The right to residuals is generally protected by collective bargaining agreements. Participations are contractual arrangements between the producer of a film or television show and a performer whereby the latter is entitled

69 Withholding tax obligations are discussed below. 70 Canada Revenue Agency, “Allocating Income to Canada for Acting Services” (online: http:// www.cra-arc.gc.ca/tx/nnrsdnts/film/ctrs/llct-eng.html). 608 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 to a percentage of the profits or, in some cases, a percentage of the gross revenues from the exhibition of the film. Both residuals and participations represent contingent payments. The cra is of the view that where non-resident actors render services in Canada, such payments are subject to Canadian taxation. Although payments may be contingent and deferred to subsequent years, the cra is of the view that the payments are for the services previously rendered in Canada. Where services are provided in Canada and other countries, an allocation of these payments must be made.71 While the cra’s position with respect to residuals appears to be correct (because the right to residual payments is embedded in the collective bargaining agreement in respect of the provision of acting services), it is questionable whether participation payments are necessarily for the acting services rendered in Canada. Ordinarily, participations will be offered by producers or studios to actors in one of two situations: where the producer is financing an “artistic” production or a picture for which financing is more difficult to obtain. In the second case, actors of significant reputation may be offered participations as part of their contract for services on top of significant fees. In this case, the issue is whether the participation is remuneration for the Canadian services or whether it is offered for the “box office” value of the actor’s name and reputation. The participation is a payment based on revenues generated, which are largely dependent on the commercial success of the film. That success is often attributable to the name and reputation of the actor, rather than the quality of the particular performance. In such case, the argument that the payment to the actor is for name and reputation, rather than for services, may have merit. As a matter of practice, where a foreign producer contracts with a non-resident actor for production services in Canada and the actor has an entitlement to participations, two contracts may be executed. The first contract could be in respect of Canadian acting services for a fixed fee. The second agreement could be in respect of services provided outside Canada, including acting services (if applicable), rehearsal services, and promotion of the film, as well as the use of the actor’s name in promotion of the film, for which a reasonable portion of the fee and the participations would be offered. Unless such an agreement could be challenged as being patently unreasonable, it appears that it would be difficult for the cra to argue that the right to participations contained in the foreign services contract should be subject to the actor tax.

Allocation of Income for Other Performing Artists Where a performing artist is paid on a per-show basis, it is relatively straightforward to compute gross income earned in Canada. With respect to deductions, any deductible expenses should be allocated on a basis that is reasonable and consistent with the income allocation.

71 Canada Revenue Agency, “Information on Withholding Tax on Residuals and Contingent Compensation” (online: http://www.cra-arc.gc.ca/tx/nnrsdts/film/ctrs/wthhldg-eng.html). taxation of non-resident artists, athletes, and other service providers n 609

However, where a performing artist earns a lump sum based on performances in Canada and abroad, it becomes necessary to determine the appropriate amount to allocate to Canada. While a straight allocation of income based on the number of performances in Canada and the number of performances abroad may be appropriate in some circumstances, it is questionable whether that would be an appropriate allocation method if the performer’s earnings were directly linked to ticket sales and the audience size per show in Canadian venues differed greatly from that in other locales. In Sumner et al. v. The Queen,72 Gordon Sumner (the rock star Sting) was re assessed on the allocation of income that he earned from a North American concert tour. Sting was a resident of the United Kingdom at the time and was employed by Roxanne Music Inc. (“Roxanne”), a us-resident corporation. Roxanne was responsible for handling Sting’s North American concert tour and was contractually required to pay Sting 95 percent of its net profits from the tour.73 Sting had allocated 2.5 percent of his overall salary from Roxanne to Canada even though Canadian concerts generated 9.11 percent of the total North American tour revenues. The 2.5 percent allocation was based on the fact that there were only six Canadian concert dates over an alleged period of 240 days for the entire tour. Sting was reassessed on the basis that he should have allocated 9.11 percent of his salary to Canada. The Tax Court upheld the reassessment on the basis that Sting did not demonstrate that the per diem method was more accurate than the gross revenue method used by the minister.74 In reaching its decision, the Tax Court noted that Roxanne had deducted 9.11 percent of Sting’s salary from its gross Canadian revenue in computing its taxable income earned in Canada, and Sting had treated almost the same amount as Canadian-source income when he completed his us tax return.

Allocation of Income for Athletes A professional athlete, such as a golfer or tennis player, who competes in an event held in Canada, is required to include all income and winnings earned from the event in computing taxable income earned in Canada. The calculation would also include any guaranteed “appearance fees”75 paid to the athlete for participating in the event. Moreover, signing or appearance fees received by the athlete that could be viewed as consideration for entering into a performance contract, rather than for the Canadian services themselves, may be deemed under paragraph 115(2)(c.1) to constitute taxable income earned in Canada if the person paying the fees was or will

72 2000 DTC 1667 (TCC). 73 Although the shares of Roxanne were not owned by Sting, the court did not accept the assertion that it dealt at arm’s length with him. 74 The approach of choosing the more reasonable of the allocation methods applied by the taxpayer and the minister was also followed in Sutcliffe v. The Queen, 2006 DTC 2076, at paragraph 66 (TCC) (appealed to the Federal Court of Appeal). 75 CRA document no. 9506595, May 9, 1995. 610 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 be entitled to a deduction under the ita in respect of such fees. As the cra states in Interpretation Bulletin it-168r3,

[n]on-residents are also liable, by virtue of paragraph 115(2)(c.1), for tax on payments received for agreeing to enter into a contract for services to be performed in Canada (i.e. signing bonuses), for undertaking not to enter into such a contract with another party or as remuneration for duties or services to be performed in Canada, if the amount so received is deductible by the payer in computing income for Canadian income tax purposes.76

Where the athlete is employed by a professional sports team, the athlete and the team must determine the portion of the athlete’s income (including any signing bonuses) that relates to employment duties performed in Canada.77 In various interpretations, the cra has suggested different approaches on how to apportion the income. These include a per diem approach based on the actual number of days that an athlete was present in Canada in a team’s season, beginning with the first day of pre-season training camp until the last day on which the team plays in a playoff game;78 per diem excluding playoffs;79 and the percentage of games played in Canada regardless of the home location of the team.80 In Austin v. The Queen,81 the Tax Court examined an allocation in connection with the contract for Kent Austin, a us-resident quarterback who played for two cfl teams (the Saskatchewan Roughriders and the Toronto Argonauts). During the 1994 and 1995 seasons, the cfl had a number of us-based franchises. Mr. Austin played three games in the United States in 1994 and four games in 1995. The minister’s position was that Mr. Austin’s income should be allocated between Canada and the United States on a per diem basis on the assumption that Mr. Austin was physically present in the United States for 6 days over a 180-day period in 1994 and 8 days over a 149-day period in 1995. The Tax Court reviewed Mr. Austin’s contract and concluded that since Mr. Austin’s salary was payable in instalments after each game, and he did not get paid for games that he did not play for any reason other than in- jury, an allocation based on number of games played in each country was far more reasonable than the minister’s method in the circumstances. Allocating income between jurisdictions becomes even more difficult where a contract includes bonus features. For example, assume that a hockey player with the nhl’s Edmonton Oilers has a contract that awards him a $500,000 bonus if he scores 40 or more goals in a season. If the player achieves the target, should the

76 Supra note 26, at paragraph 5 (emphasis added). 77 Certain treaties (such as the US treaty) exempt athletes on foreign-based teams from Canadian taxation in respect of games played in Canada. The impact of tax treaties is discussed below. 78 CRA document no. 9601625, May 28, 1996. 79 CRA document no. 9819311, August 11, 1998. 80 CRA document no. 2001-0087644, July 18, 2001. 81 2004 DTC 2181 (TCC). taxation of non-resident artists, athletes, and other service providers n 611 bonus be allocated in the same manner as his base salary, or should the Canadian- source income be based on the percentage of goals scored in Canada? While interesting arguments can be made for both interpretations, it is our view that the bonus feature is simply one element used in the determination of the player’s ultimate salary entitlement and, as such, should be allocated in the same manner as the base salary. Independent athletes who participate in tour events such as golf, tennis, or auto racing also face interesting allocation issues where series bonuses are provided to the athletes. Series bonuses are generally based on a points system whereby the athlete is awarded a certain number of points depending on his or her performance at a particular event. For example, the Professional Golfers’ Association Tour runs a points system currently called the FedEx Cup, whereby points are awarded to the top 70 golfers in each event.82 At the end of the season, a total of $35 million in annuities is distributed among the competitors according to their total points accumulation, with $10 million being awarded to the player who earns the most points. Similarly, the Indy Racing League awards points after each automobile race and provides a $1 million bonus to the IndyCar Series champion. These season-long point systems raise the question of whether an athlete who receives such a year-end bonus should be required to allocate as Canadian-source income a portion of the bonus money equal to the percentage of points earned from Canadian events. While it appears to be appropriate to do so, the cra has not issued a position on this issue, nor are we aware of any non-resident athletes who have actually allocated a portion of their series bonus to Canada. Professional tennis poses similar, if more remote, issues. Specifically, the Associ- ation of Tennis Professionals (atp) runs the atp Race. Participants in worldwide atp tennis events earn points toward the atp Race, although more points are awarded to top finishers in the Grand Slam tournaments83 and the atp Masters Series. The atp Masters Series is made up of nine events, one of which is held in Canada (the Rogers Cup). The top eight finishers in the atp Race qualify to play in the Tennis Masters Cup, where approximately us$4.5 million in prize money is allocated among the participants. Accordingly, while earning points at a Canadian event does not provide the tennis player with any direct bonuses, it may provide him or her with the opportunity to compete for substantial additional prize money. In this case, the issue is whether a participant in the Tennis Masters Cup should be required to allocate a portion of the prize money from that tournament to Canada if the player would not have qualified for that event but for his or her participation and success in the Canadian tournament.

82 Under current rules for a regular event, the winner receives 4,500 points while the 70th place finisher receives 50 points. 83 The four Grand Slam tournaments are the French Open, Wimbledon, the US Open, and the Australian Open. 612 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

In summary, there does not appear to be a single accepted methodology to allocate an athlete’s income between Canada and a foreign country. Rather, the specific terms of the particular athlete’s contract will need to be reviewed in order to determine an appropriate allocation formula in the particular circumstances.

Tre at y-Ba sed E xemp tions from Ta x ation A non-resident individual or corporation that has taxable income earned in Canada from rendering employment services or carrying on a business in Canada may still qualify for an exemption from Canadian taxation on such income by virtue of an applicable bilateral tax treaty. Canada’s treaties generally provide an exemption in respect of such income where the person providing the services has only a tangential connection to Canada. However, the nature of the exemption varies, depending on whether the person rendering the services is an individual or a corporation and whether the services are in the nature of employment (dependent personal services) or those of an independent contractor (independent personal services or business operations).

General Principles In order for a person to claim an exemption based on a provision in a tax treaty that Canada has entered into with another country, the person must be a resident of the other country for the purposes of the treaty. The treaty definition of “resident” is generally narrower than the ordinary meaning, since it is usually limited to persons who are “liable for tax” in the particular country.84 Thus, a us limited liability company (llc) does not meet the current definition of “resident” for the purposes of the us treaty, because it is the members of an llc, and not the company itself, who are subject to us income tax. However, the fifth protocol will extend treaty benefits to us residents who derive income through an entity, such as an llc, that is fiscally transparent under the laws of the United States.85 Where an exemption is available under a bilateral tax treaty, the non-resident may claim a deduction under subparagraph 110(1)(f )(i) of the ita equal to the amount that is exempt from tax under the treaty. To the extent that this deduction completely offsets the income earned by the non-resident in Canada such that no Canadian income tax is payable in the year, the non-resident (if an individual) is exempt from the requirement to file a Canadian tax return for that year.86 Where, however, the non-resident is a corporation, it must still report the income and off- setting deduction by filing a corporate tax return unless the only income earned by the corporation was income from acting services on which tax was payable under subsection 212(5.1).87

84 US treaty article IV (Residence). 85 Fifth protocol article 2, adding paragraph 7 to treaty article IV (Residence). 86 Subsection 150(1.1). 87 Paragraph 150(1)(a). taxation of non-resident artists, athletes, and other service providers n 613

Historically, Canada’s tax treaties have followed the oecd model convention88 with respect to the exemptions and limitations on source-country taxation of personal services. However, the oecd model convention was amended in April 2000 to remove the article dealing with independent personal services (services rendered by independent contractors). Such services now fall under the rubric of the general business profits article. This change reinforces the position taken in Canada89 that there is no distinction between a “permanent establishment,” which is the threshold criterion for source-country taxation of business profits, and a “fixed base,” which historically has been the requirement for source-country taxation of independent personal services. The fifth protocol has followed the oecd model convention on this point in removing article xiv (Independent Personal Services) of the us treaty.90 Furthermore, Department of Finance officials have confirmed that it is Canada’s intention to follow the change in the oecd model convention for new treaties unless the counterparty insists that the independent personal services article be retained.91 Given the amount of cross-border movement of service providers, the discussion below focuses on the specific terms of the us treaty as amended by the fifth protocol, particularly articles vii (Business Profits), xv (Dependent Personal Services), and xvi (Artistes and Athletes). However, since most of Canada’s tax treaties still retain at least the notional distinction between business profits and income from independent personal services, the language contained in article xiv will also be discussed herein.

Treaty Exemptions Generally Available to Independent Contractors Under Canada’s historical tax treaty parlance, an individual who provides services as an independent contractor is considered to have rendered “independent personal services” or “professional services,” whereas any other type of entity rendering such services is considered to have earned “business profits.” For example, under article 14 of the Canada-uk income tax convention,92 Canada has the right to tax income derived by a resident of the United Kingdom in respect of professional services or other independent activities of a similar character rendered

88 Organisation for Economic Co-operation and Development, Model Tax Convention on Income and on Capital: Condensed Version (Paris: OECD, July 2005) (herein referred to as “the OECD model convention”). 89 See Dudney v. The Queen, 99 DTC 147 (TCC); aff’d. 2000 DTC 6169 (FCA). 90 Fifth protocol article 9. 91 Recent treaties entered into by Canada with Finland and Mexico do not contain the independent personal services article. 92 Convention Between the Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, signed at London on September 8, 1978, as amended by the protocols signed on April 15, 1980, October 16, 1985, and May 7, 2003 (herein referred to as “the UK treaty”). 614 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 in Canada only to the extent that the income is attributable to a fixed base that the individual has regularly available to him or her in Canada.93 Similarly, article 7 of the uk treaty provides that Canada may tax the business profits of a uk enterprise only if the enterprise carries on business through a permanent establishment situ ated in Canada, and then only to the extent that the profits are attributable to such permanent establishment. Articles vii and xiv of the current version of the us treaty (that is, prior to the coming into force of the fifth protocol) contain similar language to that in the uk treaty. As mentioned above, the oecd has eliminated the distinction between fixed base and permanent establishment through the deletion of the independent personal services article. Consequently, services rendered by independent contractors now fall under the business profits article in which the threshold criterion for source- country taxation is the existence of a permanent establishment. The leading Canadian case on the meaning of “permanent establishment” is the Supreme Court of Canada’s decision in Sunbeam Corp. (Canada) Ltd. v. The Queen.94 In Sunbeam, the Supreme Court considered the meaning of the term “permanent establishment” in the context of provincial taxation. Sunbeam maintained its head office and manufacturing plant in Ontario but sold its products in Quebec through a sales representative located in Montreal. The issue was whether Sunbeam had a permanent establishment in Quebec and was thus entitled to claim provincial tax credits. The contract with the sales representative provided for commission sales in respect of certain Sunbeam products, with a minimum amount guaranteed. The sales representative was required to pay his own expenses to work exclusively for Sun- beam, was required to follow Sunbeam’s instructions, and did not have the authority to make contracts on behalf of Sunbeam. He had a small number of Sunbeam products for display purposes, but the orders were filled from Sunbeam’s Ontario plant. The sales representative maintained an office and office equipment in his residence, but Sunbeam did not compensate him for these expenses. The Supreme Court held that Sunbeam did not have a fixed place of business of its own in Quebec by virtue of the employment contract with the sales representative. Accordingly, Sunbeam did not have a permanent establishment in Quebec that would entitle it to the provincial tax credits. In Dudney,95 the Federal Court of Appeal upheld a Tax Court of Canada ruling on the meaning of “fixed base” within the context of article xiv (Independent Per- sonal Services) of the current us treaty. At the trial level, Bowie j compared the use of the terms “fixed base” and “permanent establishment” for the purposes of the us treaty and concluded that “there is little, if any, real difference in meaning between the two expressions as used in the Convention.”96

93 This limitation does not apply to performing artists or athletes (discussed below). 94 [1969] SCR 221. 95 Supra note 89. 96 Ibid. (TCC), at paragraph 11. taxation of non-resident artists, athletes, and other service providers n 615

Mr. Dudney, a resident of the United States, was hired as an independent contractor by a us company that provided technical training services to PanCanadian Petroleum Limited (“PanCan”), a Canadian corporation. All services provided by Mr. Dudney were performed on PanCan’s premises, and Mr. Dudney was not permitted to conduct any other business from PanCan, including using the telephone for non-PanCan purposes. Mr. Dudney had no letterhead or business cards that identified him as working at PanCan or elsewhere in Canada. The Federal Court of Appeal noted that the term “fixed based regularly available to him” is not defined in the us treaty and referred to the commentaries on the oecd model convention in determining its meaning:

These commentaries indicate that an enterprise has a “permanent establishment” where it has a “fixed place of business,” an identifiable location with a certain degree of permanence in which the business of the enterprise is being carried on. By analogy, a particular location is a “fixed base regularly available” to a person who provides independent personal services only if the business of that person is being carried on there.97

The court then identified the factors to determine whether a person carries on a business through a fixed based regularly available to him:

Thus, where a person is denied the benefit of Article xiv on the basis that he has a fixed base regularly available to him in Canada, the question to be asked is whether the person carried on his business at that location during the relevant period. The factors to be taken into account would include the actual use made of the premises that are alleged to be his fixed base, whether and by what legal right the person exercised or could exercise control over the premises, and the degree to which the premises were objectively identified with the person’s business. This is not intended to be an exhaust ive list that would apply in all cases, but it is sufficient for this case.98

The Court of Appeal agreed with the Tax Court’s finding that the PanCan premises did not constitute a location through which Mr. Dudney carried on his business, since he could use the premises only during business hours and only for the purpose of performing the contracted services for PanCan. Accordingly, the court concluded that Mr. Dudney did not have a “fixed base regularly available to him” and thus he could rely on the exemption in article xiv of the us treaty. The cra announced in Income Tax Technical News no. 2299 that it would apply Dudney in cases where it could be concluded, on the facts, that the taxpayer did not have sufficient physical control of the space within another person’s premises to be

97 Ibid. (FCA), at paragraph 16. 98 Ibid., at paragraph 19. 99 Income Tax Technical News no. 22, January 11, 2002. 616 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 carrying on his or her business in the particular place. However, in Income Tax Tech- nical News no. 33,100 the cra clarified the circumstances in which it would follow the decision in Dudney. The cra emphasized that legal control alone is not sufficient in making a determination of a fixed base or permanent establishment. It stressed that the court in Dudney had identified three factors to be considered in that case, but had indicated that the factors were not exhaustive. The cra clarified its view that it was not necessary for a non-resident to carry on all aspects of his business in Canada in order to have a permanent establishment in Canada, given the definition of permanent establishment in Canada’s treaties. Moreover, the cra indicated that it determines whether a permanent establishment exists by examining all of the facts of the given situation in light of the particular treaty, the jurisprudence, and the oecd commentary. In a 2005 decision, Toronto Blue Jays Baseball Club et al. v. Ontario (Min. of Fin.),101 the Ontario Court of Appeal considered the definition of “permanent establishment” for the purposes of the Employer Health Tax Act (Ontario) (ehta). The issue in the case was whether dressing rooms and other facilities used by the Toronto Blue Jays, the Toronto Maple Leafs, and the Toronto Raptors during away games outside Ontario constituted “permanent establishments” of the teams for the purposes of the ehta. In determining whether a permanent establishment existed at the away games, the court considered the business of professional sports teams and determined where these activities took place. The court found that fundamental to a professional sports business are the contracts entered into with the players, the sell- ing of tickets, the licensing of concessions, and negotiations relating to sponsorships, advertising, and television and radio broadcasting rights. All of these activities took place at the home venues of the teams. The space used at the locations outside On- tario was comparable to occupancy of a hotel room. Accordingly, the court concluded that the teams’ connections with and control of the venues outside Ontario was so transitory that they could not be viewed as having fixed places of business at those venues. The cra has indicated that, in its view, the Toronto Blue Jays decision is of little persuasive value, because it was not decided by a federal court and involved provincial legislation; accordingly, the cra would not be bound by the Ontario Court of Appeal’s analysis in determining whether a permanent establishment exists in Canada for the purpose of a tax treaty.102 However, while the definition of permanent establishment in the ehta is not identical to the definition in the majority of Canada’s treaties, it contains the same components. The definition requires the employer to have a business; the business must be in a fixed place; and, by virtue of deeming rules in the legislation, the definition encompasses places where the employer wholly or

100 Income Tax Technical News no. 33, September 16, 2005. 101 2005 DTC 5360 (Ont. CA). 102 Income Tax Technical News no. 34, April 27, 2006. taxation of non-resident artists, athletes, and other service providers n 617 partly carries on the business. It is therefore questionable whether the Tax Court would assign as little value to the decision as the cra suggests that it warrants. Some of Canada’s tax treaties override the common-law principles by deeming a non-resident to have a fixed base where the non-resident is present in Canada for an aggregate period exceeding 183 days in a calendar year.103 Several treaties do not contain a fixed base requirement at all.104 As noted above, when the fifth protocol comes into force, article xiv will be de- leted from the us treaty. Consequently, income from independent services rendered by an individual will henceforth be dealt with under article vii, the business profits provision, such that Canada may tax the income earned by an individual from services rendered in Canada only to the extent that such income is attributable to a permanent establishment situated in Canada. The fifth protocol will also expand the definition of “permanent establishment” by deeming certain enterprises to have a permanent establishment in the absence of a fixed location.105 For example, an individual who carries on a services business will be considered to provide services through a permanent establishment in Canada if the individual is present in Canada for a period or periods totalling at least 183 days in any 12-month period, and if, during that period or periods, more than 50 percent of the gross active business revenues from that services business consist of income derived from the services performed by the individual in Canada. It appears that the test would not be met where a particular business enterprise engages two or more individuals, who are in Canada (either individually or collectively) for 183 or more days in any 12-month period, and who, in the aggregate (but not individually), generate more than 50 percent of the gross active business revenues of the business enterprise from services rendered in Canada. When asked about this scenario, a Department of Finance of- ficial verbally confirmed that it appears to be outside the scope of the provision. An entity will also be deemed to have a permanent establishment if it provides services in Canada for a period totalling at least 183 days in a 12-month period with respect to the same or a connected project for customers who are residents of Can- ada or who maintain a permanent establishment in Canada, and if the services are provided in respect of that permanent establishment.106

103 See, for example, article XIV of the Convention Between Canada and the State of Israel for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, and the accompanying protocol, signed at Ottawa on July 21, 1975. Similar provisions are included in the Canada-Estonia income tax convention, signed June 2, 1995; the Canada-Korea income tax convention, signed September 5, 2006; the Canada-Latvia income tax convention, signed April 26, 1995; the Canada-Lithuania income tax convention, signed August 29, 1996; the Canada-South Africa income tax convention, signed November 27, 1995; and the Canada-Zimbabwe income tax convention, signed April 16, 1992. 104 For example, the Canada-Barbados income tax agreement, signed January 22, 1980; and the Canada-Jamaica income tax agreement, signed March 30, 1978. 105 Fifth protocol article 3, amending treaty article V (Permanent Establishment). 106 Ibid. 618 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

Treaty Exemptions for Dependent Personal Services Income Taxes for Employees As a general rule, most treaties with Canada permit Canadian taxation of a non- resident employee if the employment is exercised in Canada. According to the oecd commentary, employment is exercised in the place where the employee is physically present when performing the activities for which the employment income is paid. Most bilateral tax treaties with Canada contain language in their dependent personal services article107 that provides a tax exemption from Canadian tax to the employee if (1) the employee is not present in Canada for more than 183 days,108 (2) the remuneration is paid by a non-resident employer, and (3) the remuneration is not “borne by” an employer with a fixed base or permanent establishment in Canada.109 Under the oecd model convention, the first condition is that the amount of time spent in the country of employment must not exceed 183 days in “any twelve month period commencing or ending in the fiscal year concerned.” However, most of Canada’s tax treaties require the employee’s presence in Canada to be less than 183 days in a calendar year. In applying the 183-day rule, the word “day” includes any day or part of a day of the calendar year in which the person was physically present in Canada (including holidays and weekends), regardless of the number of hours present. The calendar year in which the 183 days are counted is the year in which the employment is exercised, not necessarily the year in which the remuneration is received. 110 Currently, the us tax treaty refers to the calendar year. In order to mirror the wording in the oecd model convention, the fifth protocol will amend article xv by referring to “any twelve-month period commencing or ending in the fiscal year concerned.” The commentary accompanying the oecd model convention states that this wording ensures that any 12-month period is covered. The second condition in the dependent personal services article is that the employer paying the remuneration must not be a resident of the country in which the employment is exercised. The commentary on the oecd model convention explains that the purpose of this condition is to “avoid the taxation of short-term employments to the extent that the employment income is not allowed as a deductible expense in the State of source”111 because the employer is not resident in that country.

107 In the OECD model convention, with the elimination of the independent personal services article, the title of article 15 has been changed to “Income from Employment.” 108 Three treaties require that the employee not be present in Canada for more than 90 days: the Canada-Egypt income tax convention, signed May 30, 1983; the Canada-Indonesia income tax convention, signed January 16, 1979; and the Canada-Papua New Guinea income tax convention, signed October 16, 1987. 109 See, for example, article 15 of the UK treaty. 110 Information Circular 75-6R2, “Required Withholding from Amounts Paid to Non-Residents Performing Services in Canada,” February 23, 2005, paragraph 93. 111 Paragraph 6.2 of the commentary on article 15 of the OECD model convention. taxation of non-resident artists, athletes, and other service providers n 619

Under the third condition, relief from source-country taxation is granted to an employee where the remuneration is not “borne by” the employer’s permanent establishment in the country where the employment was exercised. The oecd model convention states that the phrase “borne by” must be interpreted in light of the purpose of the second condition, which is intended to ensure that the relief does not apply to remuneration that could give rise to a deduction to the employer. The oecd commentary explains that the fact that the employer has, or has not, deducted the remuneration in computing the profits attributable to a permanent establishment is not conclusive. The cra has adopted the oecd’s interpretation that the words “borne by” mean that the expense is allowable as a deduction in calculating taxable income under the ita. Accordingly, the expense cannot be allowable in calculating taxable income by a resident of Canada or an employer who has a permanent establishment or fixed base in Canada for a non-resident employee to be eligible for a treaty-based waiver. Remuneration is considered to be borne by a person if the remuneration is ultimately charged back to that person either directly or indirectly, through a management or administration fee or otherwise. The fact that the employee continues to be paid from the other country is not relevant in deciding by whom the remuneration was borne.112 The term “employer” is not defined in the ita or in tax treaties with Canada. The cra relies on the common-law test, discussed above, to determine the nature of the relationship between the worker and the hirer. The commentary on the oecd model convention recognizes the potential for abuse, in cases where a local employer hires foreign workers through an intermediary established abroad who purports to be the employer of the foreign workers. In this scenario, the workers meet all of the conditions to qualify for treaty relief. According to the oecd model convention, the term “employer” should be interpreted as “the person having rights on the work produced and bearing the relative responsibility and risks.” The commentary states that “in this context, substance should prevail over form.”113 As noted earlier, recent Canadian jurisprudence reflects a departure from this interpretation; that is, in determining the relationship between a hirer and a worker, the courts give weight to written agreements between the parties. In light of the oecd commentary, the cra may argue that, in the context of interpreting a tax treaty, written agreements should be given reduced or no weight. It will be interesting to see how the Canadian courts reconcile the recent jurisprudence with the oecd commentary, especially given that the courts have generally relied on the commentary as an in- terpretive aid, as illustrated in Dudney. Finally, article xv of the us treaty contains an additional exemption, in paragraph 2, that applies where the remuneration earned from the particular employment does not exceed $10,000 (in the currency of the country where the employment was

112 IC 75-6R2, supra note 110, at paragraph 95. 113 See paragraph 8 of the commentary on article 15 of the OECD model convention. 620 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 exercised). The $10,000 exemption is applied against each employment, not all employments.114

Social Security and Employment Insurance Under the Canada-us social security agreement, where an employee resident in the United States is required by an employer to work temporarily in Canada, the employee will not be subject to the Canada Pension Plan regime; rather, the employee will be subject to the social security laws of the United States only.115 A us-resident employee may request a certificate of coverage from the Social Security Administra- tion in the United States. Generally, a us-resident employee will need a certificate only if he or she will be working in Canada for more than 183 days in a calendar year. If the employee will be in Canada for 183 days or less, a certificate will not be needed unless the other country requests one. Employees and employers are required to make payments with respect to employment insurance only if the employment is considered to be “insurable employment.”116 Under section 7 of the Employment Insurance Regulations,117 a non-resident person who is subject to unemployment insurance laws in his or her country of residence will not be considered to be performing “insurable employment” within the meaning of the Employment Insurance Act. Specifically, that section states, “[E]mployment in respect of which premiums are payable under . . . the unemployment insurance law of any state of the United States, the District of Columbia, Puerto Rico or the Virgin Islands, by reason of the Agreement between Canada and the United States Re- specting Unemployment Insurance” is not insurable employment.

Treaty Exemptions for Artistes and Athletes Under Canada’s tax treaties and the oecd model convention, performing artists (referred to as “artistes” or “entertainers”) and athletes are generally not permitted to claim treaty exemptions to the same extent as persons in other occupations in respect of the provision of personal services.118 Specifically, the relief generally available in

114 Prescott v. The Queen, 96 DTC 1372 (TCC). 115 Article V(2)(a) of the Agreement Between the Government of Canada and the Government of the United States of America with Respect to Social Security, signed at Ottawa on March 11, 1981, reads in part as follows: “Where a person who is normally employed in the territory of one Contracting State and who is covered under its laws in respect of work performed for an employer having a place of business in that territory is sent by that employer to work for the same employer in the territory of the other Contracting State, the person shall be subject to the laws of only the first Contracting State in respect of that work, as if it were performed in the territory of the first Contracting State. The preceding sentence shall apply provided that the period of work in the territory of the other Contracting State is not expected to exceed 60 months.” 116 Employment Insurance Act, supra note 48, section 5. 117 SOR/96-332, as amended. 118 See, for example, US treaty article XVI. taxation of non-resident artists, athletes, and other service providers n 621 respect of the provision of independent personal services or dependent personal services119 does not apply, with certain exceptions, to an entertainer or an athlete. This carve-out allows Canada to tax non-resident professional athletes on their earnings from Canadian games or events, and non-resident musicians on proceeds from Canadian concerts. With respect to the us treaty, the carve-out from general treaty relief is contained in article xvi. However, as indicated above, article xvi does contain certain exceptions to the denial of treaty benefits. For example, the carve-out does not apply to us-resident entertainers and athletes whose income from Canadian activities does not exceed $15,000 in the particular calendar year.120 In such cases, the entertainer or athlete may be entitled to claim treaty relief under article vii, xiv, or xv of the us treaty, if applicable.

Artistes Article xvi applies to a non-resident who derives income from “personal activities” performed “as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician.”121 In a technical interpretation, the cra took the position that a us-resident lighting designer who performed services in Canada for opera and theatre was not an “artiste” within the meaning of article xvi.122 The cra concluded that technical personnel and other support staff should not be considered to be entertainers and are therefore entitled to the general relief provided in Canada’s tax treaties. However, in Cheek v. The Queen,123 the cra argued that the long-time radio announcer for the Toronto Blue Jays, Thomas Cheek, was a radio “artiste” and thus fell within the scope of article xvi. The Tax Court of Canada disagreed with the cra and concluded that fans turned on the radio to follow the baseball game rather than to listen to the announcers; thus, the court held that Mr. Cheek was a journalist rather than an entertainer and was therefore not subject to article xvi of the us treaty.

Athletes Article xvi does not apply to American athletes who participate in a league with regularly scheduled games in both Canada and the United States.124 Accordingly, athletes who fall within this category may be entitled to relief from Canadian taxation by virtue of article xv of the us treaty. This will exempt most players on us-based

119 See, for example, US treaty articles VII, XIV, and XV. 120 US treaty article XVI(1). The $15,000 limit applies to gross receipts, including expenses reimbursed or borne by the entertainer or athlete. 121 US treaty article XVI(1). 122 CRA document no. 1999-0009997, March 2, 2000. 123 2002 DTC 1283 (TCC). 124 US treaty article XVI(3). 622 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 franchises from Canadian taxation in respect of games played in Canada provided that the athlete is present in Canada for no more than 183 days in any particular calendar year (since the remuneration would generally not be borne by a Canadian resident or a Canadian permanent establishment of the American franchise). How- ever, most non-resident athletes employed by franchises located in Canada will be subject to Canadian taxation on the portion of their salary that is attributable to services performed in Canada.125 The cra has taken the position that the reference in article xvi to “regularly scheduled games” was intended as a “concession to hockey and baseball players etc. where the teams are required to compete in all games in a regular schedule.”126 The cra concluded that a race-car driver who performs in a touring racing series is an athlete but does not qualify for the exemption from the carve-out, since the racing team is not required to enter each event in the series and thus the series would not be considered to be “a league with regularly scheduled games.”127 Article xvi of the us treaty also limits source-country taxation of signing bonuses paid to non-resident athletes to 15 percent of the gross amount of the payment.128 However, since Canada only taxes the portion of the signing bonus that is reasonably attributable to services performed in Canada, the limitation will be relevant only to the extent that the Canadian federal and provincial tax on the Canadian portion of the payment exceeds 15 percent of the gross amount of the full payment. Although article xvi does not refer to payments made to an athlete to sign a contract not to perform for other teams, the technical explanation accompanying the us treaty indicates that such payments would be taxable in Canada at the rate of 15 percent. The technical explanation is silent on whether an amount paid to an athlete as consideration to waive other rights contained in the player’s contract (such as a “no trade” clause) would also be taxable in Canada under article xvi. It will be interesting to see if the cra considers such payments to fall within the ambit of the term “restrictive covenant”129 for the purposes of proposed section 56.4 of the ita and, as a result, be subject to withholding tax under proposed paragraph 212(1)(i) of the ita.

125 See the discussion above regarding the allocation of an athlete’s income between Canada and other countries. 126 CRA document no. 9204805, July 15, 1992. 127 Ibid. 128 US treaty article XVI(4). 129 Under proposed section 56.4, a “restrictive covenant” is broadly defined as “a waiver of an advantage or right by the taxpayer . . . whether legally enforceable or not, that affects, or is intended to affect, in any way whatever, the acquisition or provision of property or services by the taxpayer.” See Bill C-10, An Act To Amend the Income Tax Act, Including Amendments in Relation to Foreign Investment Entities and Non-Resident Trusts, and To Provide for the Bijural Expression of the Provisions of That Act, passed by the House of Commons on October 29, 2007. taxation of non-resident artists, athletes, and other service providers n 623

Use-of-Likeness Payments to Artistes and Athletes Notwithstanding the general exclusion from treaty relief for non-resident artistes and athletes, treaty relief may be available where the non-resident has agreed to provide use of likeness (that is, to allow his or her image to be included) in a mer- chandising campaign (for example, on tee-shirts). While a payment for use of likeness within Canada may be considered to be a payment within the ambit of subparagraph 212(1)(d)(i) of the ita as a “rent, royalty or similar payment for the right to use in Canada any property,” and thus subject to 25 percent withholding tax, it would not be considered to be a “royalty” within the meaning of article xii of the us treaty.130 The payment may be outside the scope of article xvi of the us treaty as well, since it is arguably not derived from personal activities exercised in Canada. Accordingly, such payment may fall within the general business profits provisions and would be taxable in Canada only to the extent that the artiste or athlete maintained a fixed base or permanent establishment in Canada.

Withholding Obligations General Principles The ita imposes tax withholding obligations on persons who make certain types of payments to non-residents.131 The amounts withheld from the payment to the non-resident are required to be remitted to the receiver general on account of the non-resident’s taxes potentially payable under the ita. However, the determination of the amount to be withheld (absent an administrative waiver from the cra) is computed independently of the non-resident’s ultimate tax liability. For example, a particular non-resident may be exempt from Canadian taxation in respect of a particular payment by virtue of a tax treaty; nevertheless, the payment may still be subject to withholding. To the extent that the amount withheld exceeds the non-resident’s actual taxes payable, the non-resident can request a refund. This is accomplished by filing a non-resident tax return in respect of part i taxes withheld or by making an application for a refund of amounts withheld in the case of part xiii withholding tax.132 While part xiii of the ita sets out a complete regime for withholding on specified types of payments to non-residents (generally, passive income sourced in Canada),

130 US treaty article XII(4) defines “royalties” as “payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work . . . , any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, tangible personal property . . . and . . . includes gains from the alienation of any intangible property.” The licence of an intangible personality right does not come under this definition. The UK treaty provides a similar result. 131 ITA part I, section 153 and related regulations, and ITA part XIII. The ITA also imposes withholding obligations in respect of certain payments to residents of Canada—for example, source deductions on salaries and bonuses. 132 Subsection 227(6). 624 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 the withholding obligations for active income earned by a service provider are found in section 153 of the ita and in part i of the regulations. Specifically, subsection 153(1) requires persons making various types of payments to withhold taxes on account of the recipient’s liability. The quantum of the withholding is prescribed under the regulations and varies depending on the nature of the payment and the residence of the recipient. For the purposes of this article, the relevant provisions in subsection 153(1) are paragraphs (a) and (g). Paragraph 153(1)(a) pertains to payments of salary, wages, or other remuneration (that is, employment-related payments), and paragraph 153(1)(g) applies to fees, commissions, or other amounts for services (that is, payments to independent contractors). Both provisions exclude payments that are subject to the actor tax (subsection 212(5.1))133 or that fall within the ambit of subsection 115(2.3) (which deals with income earned by certain non-residents in connection with the 2010 Olympic or Paralympic Winter Games). Part i of the regulations sets out the rules pertaining to the deduction and remittance of amounts required to be withheld under subsection 153(1). The manner of withholding will depend on whether the payment constitutes “remuneration.” Re- muneration is defined in regulation 100 and includes, inter alia, salary, wages, or commissions.134 Where an employer pays an amount of remuneration, the employer must withhold the amount of source deductions described in regulations 102 (periodic payments) and 103 (non-periodic payments). Employee source deductions are required regardless of the employee’s residence status, except where the employee was neither employed nor resident in Canada at the time of the payment (unless the employee was previously resident in Canada or the payment was reasonably attributable to employment services performed or to be performed in Canada).135 If the person is making a payment in respect of services rendered in Canada that is not “remuneration” as defined in regulation 100(1), regulation 105 will apply. Reg- ulation 105 requires “every person” paying a fee, commission, or other amount to a non-resident of Canada in respect of services rendered in Canada (other than “remuneration”) to withhold 15 percent of that amount.136 Note that regulation 105 does not apply solely to Canadian-resident payers: foreign persons must also withhold 15 percent of the amount paid to independent service providers to the extent that the services are performed in Canada.137

133 There is no such exclusion under the TAQ. 134 Regulation 100(1). 135 Regulation 104. 136 See regulation 105(1) and the exception in regulation 105(2). 137 Regulation 1015R8 of the TAQ imposes a similar withholding tax at the rate of 9 percent if a person makes a “payment for services rendered in Québec by a person who is not resident in Canada, other than in the course of regular and continuous employment.” Therefore, services rendered in Quebec by a non-resident independent contractor are subject to withholding taxes at the combined federal and provincial rate of 24 percent. taxation of non-resident artists, athletes, and other service providers n 625

It is possible that certain arrangements could result in multiple levels of withholding. Consider, for example, a foreign company that provides technical expertise to Canadian customers by sending its employees to the customer’s place of business. Payments made by the customer to the foreign company will likely be subject to 15 percent withholding under regulation 105, since the foreign company receives a fee in respect of services rendered in Canada by its employees. However, the foreign company will also be required to withhold under regulation 102 on payments of remuneration to its employees in respect of the same services. This double withholding can create significant cash flow problems, especially where the foreign company is a loan-out company for the person who provides the services in Canada. If the individual provided the services directly to the Canadian client rather than through the loan-out company, there would only be withholding under regulation 105. In these situations, it may be possible to request that the cra waive a portion of the overall amount of withholding pursuant to the hardship provisions in subsection 153(1.1).138 The procedures for requesting waivers are outlined below. It is important to note that withholding under regulation 105 is not limited to direct fees for services rendered in Canada, but rather applies to payments “in respect of” services rendered in Canada.139 The phrase “in respect of” has been held to have the widest possible meaning in conveying a connection between two related subject matters.140 There have been two recent cases that have examined the scope of this phrase in the context of regulation 105; one widened the scope of situations wherein withholding applies, and the other narrowed the withholding obligation. In Ogden Palladium Services (Canada) Inc. et al. v. The Queen,141 the appellants provided stadium facilities and related services to Marco Entertainment, Inc. (“Marco”), the us-resident producer of a figure skating show starring Elvis Stojko. The related services provided by the appellants to Marco included the production and sale of tickets, ticket collection, provision of maintenance staff, sale of food and beverages, and sale of souvenirs, programs, and novelties. Since the taxpayers were responsible for revenue collection, they made the payment of net revenues to Marco after recovering their fees for the stadium usage and services. No withholding under regulation 105 was made in respect of the remittance of net revenues to Marco, on the basis that Marco did not render services to the taxpayers (rather, the taxpayers provided services to Marco). The minister argued that the person to whom the services had been rendered was not relevant to the assessment, and that if a payment had been made to a non-resident in respect of any services rendered in Canada, then the regulation 105 withholding obligations applied. The Tax Court found that Marco, as the producer of the show, was providing services in Canada by presenting the show for the benefit of the public. In addition, the Tax Court found that the

138 Also see section 1016 of the TAQ. 139 In contrast, the TAQ taxes only payments for services. See supra note 137. 140 Nowegijick v. The Queen et al., 83 DTC 5041 (SCC). 141 2001 DTC 345 (TCC); aff’d. 2002 DTC 7378 (FCA). 626 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 performers were providing services in Canada to which the payments to Marco related. Accordingly, the Tax Court concluded that the taxpayers did have an obligation to withhold under regulation 105. This case indicates that the withholding requirements under regulation 105 are quite broad and can capture payments where the payer is not receiving any services in Canada from the non-resident recipient of the payment. The cra has confirmed its acceptance of this position in Information Circular 75-6r2:

The cra takes a broad interpretation of the wording “in respect of.” Therefore, a particular payment need not necessarily be paid only for services or, be paid to the person who performed the services in order for Regulation 105 withholding to apply.142

Interestingly, regulation 105 uses the wording “in respect of” (which, as noted by the cra, is quite broad), whereas paragraph 153(1)(g), the enabling legislative authority, uses the phrase “for services,” which denotes something more restrictive. It has long been held that Cabinet cannot enact regulations that go beyond the scope of the enabling legislation.143 This raises the question of whether regulation 105 is ultra vires. The recent decision of the Tax Court of Canada in Weyerhaeuser Company Limited v. The Queen144 considered this argument and found that regulation 105 is not ultra vires. In reaching its conclusion, the court noted that paragraph 153(1)(g) does not impose tax but simply ensures that there are funds available to satisfy the non-resident person’s obligation (if any) under the ita. Relying on the principle that where there are two possible constructions of the statute, one that will result in the statute being intra vires and one that will have the contrary result, the former construction should be adopted,145 the court concluded that it was possible to read regulation 105 in a manner that would render the regulation intra vires. The court wrote:

I would nevertheless have concluded that it was entirely beyond doubt that the Gov- ernor in Council’s intention in enacting Regulation 105 was to require withholding at the rate of 15% from all payments to non-resident service providers to the fullest extent that paragraph 153(1)(g) of the Act permits—that is, from all payments having the character of remuneration for services rendered in Canada, and thus potentially taxable by Canada in the non-resident’s hands.146

Although the court held that regulation 105 is intra vires, the court held that withholding under regulation 105 “does not extend beyond requiring the payor to deduct

142 Supra note 110, at paragraph 6. 143 MNR v. Midwest Hotel Co. Ltd., 70 DTC 6316 (Ex. Ct.); aff’d. 72 DTC 6440 (SCC). 144 2007 DTC 392 (TCC). 145 McKay v. The Queen, [1965] SCR 798. 146 Weyerhaeuser, supra note 144, at paragraph 13. taxation of non-resident artists, athletes, and other service providers n 627 and withhold from payments of amounts that are in the nature of fees or commissions that, in the hands of the recipient, have the character of income earned in Canada.”147 The court also clarified the intended scope of section 153 and regulation 105, holding that their application is limited to amounts that would be considered income earned in Canada by the non-resident. Accordingly, the court held that a reimbursement of the non-resident’s out-of-pocket expenses, fees for time spent in respect of travel to Canada, and retainers for work to be completed outside Canada were all beyond the scope of regulation 105, and no withholding was required in respect of such amounts. The latter element of the decision in Weyerhaeuser directly refutes a number of the administrative positions taken by the cra in ic 75-6r2. In particular, it has been the cra’s position that regulation 105 withholding would apply to payments for time spent travelling to and from the non-resident’s home country on the basis that the payment would be considered to have been paid in respect of services rendered in Canada.148 Furthermore, the cra exempts withholding for reimbursement of out-of-pocket expenses only in limited circumstances. Generally, the cra exempts withholding on per diems for meals, up to $45 per day, and accommodation, up to $100 per day, without requiring receipts. (Different treatment applies to actors, as discussed below.) Reasonable travel expenses in excess of such amounts will be exempt from withholding only if they are supported by third-party vouchers. In Weyer- haeuser, the court held that the invoices supplied by the non-resident, which indicated the amount of disbursements that the non-resident had incurred, constituted sufficient prima facie evidence to support the exemption from withholding. To date, the cra has not provided further comments on the Weyerhaeuser decision or ic 75-6r2.

Withholding Obligations for Actors As stated above, paragraphs 153(1)(a) and (g) contain exclusions for amounts paid to a non-resident actor or to a corporation related to a non-resident actor. However, such payments are subject to part xiii withholding, pursuant to the actor tax provisions (subsections 212(5.1) to (5.3)). Furthermore, the very transient nature of film location shooting raises unique issues for film crews. Accordingly, ic 75-6r2 specifically excludes from its application those individuals who are engaged in the film and video production industry in Canada. The cra has established specialized film services units in the main Canadian production centres in order to address withholding and other issues that are specific to the film and television industry. Subsection 215(1) requires a person who pays, credits, or provides, or is deemed to have paid, credited, or provided, an amount that is subject to part xiii tax (or which would be subject to part xiii tax if the ita were read without reference to

147 Ibid. 148 Supra note 110, at paragraph 14. 628 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 subsection 216.1(1)) to deduct or withhold from the amount of the payment the requisite amount of part xiii tax and remit the tax to the receiver general on behalf of the non-resident. The reference to subsection 216.1(1) makes it clear that the obligation to withhold under part xiii in respect of the actor tax exists even if the actor elects to be subject to part i taxation rather than the actor tax under part xiii. However, the cra does permit a non-resident actor to apply for a reduction in withholding taxes (by filing form t1287, “Application by a Non-Resident of Canada (Individual) for a Reduction in the Amount of Non-Resident Tax Required To Be Withheld on Income Earned from Acting in a Film or Video Production”) where the actor will be making an election under section 216.1. The application relates strictly to acting income. Where a non-resident earns both acting and non-acting fees (for example, producer or director fees), a separate application for a regulation 105 withholding tax waiver will be required for the other fees.149 Upon receipt of form t1287, the cra will determine whether a section 216.1 election would benefit the actor; if it would, the cra will authorize the production company to reduce the amount of tax that it would otherwise withhold from the actor’s compensation. The withholding obligations in connection with the actor tax differ from those under regulation 105. As discussed above, regulation 105 requires withholding “in respect of” services rendered in Canada. In contrast, withholding for the actor tax is limited to amounts paid or credited, or provided as a benefit, to or on behalf of the non-resident for the provision in Canada of the acting services. This appears to exclude payments of the nature referred to in Ogden Palladium150 from the ambit of part xiii withholding. However, the part xiii withholding obligations will still require a determination of what portion of the overall compensation paid to the actor is subject to withholding.

Fees for Acting Services Fees for acting services are subject to the actor tax provided that they relate to the provision of services in Canada. Where services are provided in Canada and elsewhere (for example, in the case of an international production that has rehearsal and shooting days in various jurisdictions), a reasonable allocation must be made for acting services in Canada. The cra’s position in this regard has been elaborated in an earlier section of this article. Similarly, where an actor provides additional functions on a production (for example, as a director or an executive producer), a reasonable allocation must be made for the portion of the fee that is allocable to acting services subject to part xiii tax and the portion that is attributed to other services subject to part i tax. The latter portion may also qualify for a treaty-based exemption.

149 The waiver procedure is discussed in more detail below. 150 See supra note 141 and the accompanying text. taxation of non-resident artists, athletes, and other service providers n 629

Per Diems, Travel Expenses, and Living Expenses The cra’s film services units have established their position for withholding on per diems, travel expenses, and living expenses for actors; however, that position has not yet been revisited in light of the Weyerhaeuser decision.151 The exemptions from withholding on actors’ per diems are substantially similar to those accorded to other foreign service providers. However, for actors, the exemption for unreceipted meal expenses is raised from the general limit of $45 per day to $100 per day, and there is no allowance for unreceipted hotel expenses.

Residuals and Participations Both residuals and participations represent contingent payments. The cra is of the view that the actor tax applies to all payments to non-resident actors who render services in Canada.152 Although payments may be contingent and deferred to subsequent years, the cra is of the view that the payments are for the services rendered in Canada. Consequently, the withholding obligation of the payer may extend well beyond the year in which the film is shot. This ongoing obligation raises various practical problems for foreign production entities. Procedures for dealing with withholding obligations to Canadian tax authorities are typically set up for payments made during the Canadian phase of the production, and are handled by local production executives. Once the Canadian phase has been completed, accounting records are generally removed from Canada, and any subsequent contingent payments to actors are handled outside Canada by studio accounting executives. For example, assume that a Hollywood studio contracts with a high-profile actor to film in Vancouver in 2007. The film generates a profit in 2011, a portion of which is payable as a participation to the actor. It is un- likely that any of the studio accounting executives keeping track of the payments would be aware that the film was shot in Canada and that Canadian withholding was required. Often the participation payment is made by a person other than the production company. Further, where services on a production have been rendered in multiple jurisdictions, the allocable portion of the contingent payment to Canadian services becomes difficult to identify. In light of these difficulties, in 2006 the cra proposed a new administrative policy for non-resident payers who may experience difficulty in determining the portion of future withholding due on account of residuals and participations.153 However, because of serious concerns raised by the film industry, this new policy is not yet in

151 See supra note 144 and the accompanying text. 152 See “Information on Withholding Tax on Residuals and Contingent Compensation,” supra note 71. 153 Ibid. 630 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 force and has been delayed “indefinitely.” Until such time as the cra makes a definitive statement, it appears that Canada will not be seeking withholding tax from non- resident payers of contingent payments except in two circumstances: the obligation to withhold actor tax will apply to payments in respect of acting services on a commercial, and to payments made during the course of production or during the payment period on account of a buy-out, advance payment, or prepayment of the future contingent payment. The policy does not apply to payers who are residents of Canada. Thus, if the obligation to pay residuals and/or participations rests with the Canadian production company rather than the foreign studio, there will not be any reprieve from withholding obligations as a result of the policy. The proposed policy requires payment by the non-resident of the 23 percent actor tax on the full amount of any contingent payment allocable to Canadian services. However, if the non-resident payer cannot determine the appropriate allocation, it may follow the procedure outlined below:

1. The payer must include a clause in the actor’s contract affirming his or her obligation to pay the 23 percent actor tax on contingent compensation. The cra will provide a standard-form addendum that must be appended to the contract, and receipt must be acknowledged by the actor. 2. The payer must provide detailed notification in writing to the cra of the potential situation, including the earliest possible start date for participation payments, identification of all relevant parties (including agents, prospect ive payers of residuals, or participants), contract information for the actor, and a copy of the contract, deal memo, or agreement. The notification should also explain how the proposed withholding will apply, and include an undertaking to provide detailed information of any contingent payments made, if so requested by the cra. 3. If the cra is satisfied as to the method of calculation and that the actor will pay the tax personally, it will issue a letter indicating that any future enforcement action will be initiated against the actor only.

This policy, if adopted, would set Canada apart from other jurisdictions in its enforcement of domestic tax laws applicable to foreign actors. Given the proposed requirements set out above, it is understandable that there is concern in the film industry over this degree of compliance to deal with contingent payments to actors. In light of the mobility of the industry, there is a risk that this type of policy may drive foreign “big budget” feature film productions away from Canada. Finally, as a matter of enforcement, participations are generally payable years after the services were rendered. The cra would have difficulty in enforcing the withholding provisions on payments allegedly due from one non-resident to another where there are no remaining connections to Canada. To our knowledge, the cra has taken no action to enforce collection of tax on such payments relating to productions filmed in Canada; however, there are only a few that might have been successful enough to generate participations. taxation of non-resident artists, athletes, and other service providers n 631

Withholding Obligations for Athletes and Behind-the-Camera Personnel In contrast to actors, non-resident athletes and film crews will be subject to withholding in accordance with the general principles outlined above. Accordingly, to the extent that a payment pertains to services rendered in Canada by the athlete or behind-the-camera service provider, withholding will be required under regulation 102, 103, or 105, depending on the nature of the payment and the status of the individual as employee or independent contractor. The methodology for allocating income of an athlete or other service provider between Canada and other countries has been discussed in an earlier section of this article. Tournament winnings earned by athletes raise an interesting issue. While such earnings clearly fall within the ambit of subparagraph 115(1)(a)(ii),154 and are therefore taxable in Canada, they do not seem to fit neatly into any of the withholding categories set forth in section 153. Specifically, prize winnings do not seem to constitute “fees, commissions or other amounts for services” within the context of paragraph 153(1)(g), since the earnings are for success in the competition rather than for any particular services. In an unreported decision, the Tax Court of Canada held that the International Cycling Union, which was the tournament organizer for a cycling race held in Canada, was not obligated to comply with regulation 105 in respect of winnings paid to non-resident participants.155

The 2010 Vancouver Olympic Winter Games It is a long-standing tradition that host countries provide tax relief in order to fa- cilitate the Olympic Games. To this end, Canada has enacted measures that apply specifically to the 2010 Vancouver Olympic and Paralympic Winter Games. In particular, the International Olympic Committee (ioc) and the International Paralympic Committee (ipc) are exempted from non-resident withholding taxes on payments made to them after 2005 and before 2011 that are made in connection with the 2010 Winter Games.156 Moreover, employees and consultants of the ioc and ipc, foreign athletes, team support staff, officials, and accredited foreign media organizations and their employees will be exempted from Canadian income taxes on income derived from their activities in connection with the Winter Games after 2009 and

154 Prizes earned in the course of carrying on a business are treated as business income and included in income under subsection 9(1) of the ITA: see Interpretation Bulletin IT-75R4, “Scholarships, Fellowships, Bursaries, Prizes, Research Grants and Financial Assistance,” June 18, 2003, paragraph 19; and Hammond v. MNR, 71 DTC 5389, at 5390 (FCTD), in which Pratte J held that “prize money is income only inasmuch as the taxpayer’s racing activities are such that they can be considered as a business.” 155 Union Cycliste Internationale v. The Queen, 1999-1969(IT)G (TCC) (unreported). See also Gestion d’évènements Gestev Inc. v. The Queen, 1999-1974 (IT)G (TCC) (unreported). 156 Subsection 212(17.1). 632 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 before April 2010.157 Finally, regulation 105 will not apply to payments to these individuals, organizations, and employees for services rendered in Canada.158 Thus, for example, if a non-resident athlete is paid by a commercial sponsor on the basis of his or her 2010 Winter Games performance, income from this activity falling within the specified timeline will be exempt from Canadian income taxes and the non-resident withholding tax will be waived.

Withholding Ta x Waivers General Principles Often, non-residents performing employment duties in Canada or rendering services in Canada will have no Canadian income tax liability as a result of an exemption under a relevant treaty or, in the case of an independent contractor, because the contractor has no net Canadian-source income.159 If the payer is withholding the full amount as required under the ita and the non-resident is entitled to a refund of the amount only after filing a Canadian tax return (which could be many months after the payment has been made), this may act as a disincentive for a non-resident to work or provide services in Canada. Accordingly, the cra may waive or reduce the withholding pursuant to the undue hardship provisions of subsection 153(1.1) where a non-resident can demonstrate, on the basis of treaty protection or estimated income and expenses, that the normally required withholding is in excess of the ultimate Canadian tax liability.160 The waiver application process constitutes an advance screening by the cra of the applicant’s ultimate tax liability. If there is insufficient information to conclu- sively support the applicant’s position that the amount to be withheld will exceed his or her actual tax liability, the cra will deny the waiver and require the applicant to file a non-resident tax return to claim a refund of any excess withholdings. It should be noted that the granting of a waiver or reduction of withholding on amounts to be received by a non-resident does not relieve the non-resident from the requirement to withhold, remit, and report all payments that it makes to other persons (such as employees) for services provided in Canada.161 If the non-resident

157 Subsection 115(2.3). 158 Paragraphs 153(1)(a) and (g). 159 As noted earlier, under the TAQ, the contractor will not be subject to tax in Quebec if the income from the business carried on by him in Canada is not attributable to an establishment in Quebec. See supra note 13. 160 IC 75-6R2, supra note 110, at paragraph 56. Hardship waivers in respect of Quebec withholding taxes are provided for under section 1016 of the TAQ. See Interprétation Revenu Québec ADM. 7-1, “Reduction in Source Deductions of Income Tax in Respect of a Payment for Services Rendered in Québec by a Person Not Resident in Canada,” November 30, 2004. 161 IC 75-6R2, supra note 110, at paragraph 43. taxation of non-resident artists, athletes, and other service providers n 633 service provider has such payment obligations and a subsequent followup by the cra discloses that the non-resident payer/employer has not fulfilled the requirements under the ita in respect of such payments, the waiver may be cancelled and the payer told to begin withholding accordingly.162 Even if the cra issues a treaty-based waiver, it may require a Canadian bank guarantee or other appropriate security for an amount equivalent to the potential Canadian tax liability of the non-resident in Canada. This could arise in cases where there are secondary withholding tax issues affecting the non-resident applicant.163 Where a non-resident has a contract to perform services in Canada but sub contracts with either residents of Canada or other non-residents to undertake the actual performance of those services, a treaty-based waiver will not be granted in respect of the contract unless the activities of the subcontractors, along with any other activities that the primary contractor undertakes in Canada, fall within the guidelines. For the purpose of applying the guidelines in this situation, the activities of the Canadian-resident subcontractors will be viewed as if the subcontractors were non-residents and their only activities in Canada were those under the subcontract. Payments to subcontractors will be considered for deduction under an alternative income and expense waiver application. Generally, waiver applications should be submitted at least 30 days before either the commencement of services in Canada or the initial payment, in order to ensure that the waiver is obtained before the first payment is made.164 A waiver application can be made subsequent to the start of payment; however, the waiver will apply only to payments made after the waiver was issued.165

Regulation 102 Waivers The cra will grant a regulation 102 treaty-based waiver if a non-resident employee can provide evidence that the payments will be exempt under a bilateral treaty between Canada and the employee’s jurisdiction of residence. To apply for a regulation 102 waiver, the employee (or the employer with the employee’s authorization) must submit a copy of the employment contract and proof of residence status, and must identify the particular treaty article pursuant to which the employee is claiming an exemption from Canadian taxation.166

162 Ibid., at paragraph 44. 163 Ibid., at appendix B. 164 Ibid., at paragraph 60. 165 Ibid., at paragraph 61. 166 Ibid. 634 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

Treaty-Based Regulation 105 Waivers General Rules for Eligibility Non-residents who provide independent services in Canada may apply for a waiver of regulation 105 withholding taxes by filing form r105.167 As discussed above, regu lation 105 requires withholding in respect of services rendered in Canada. The cra has issued guidelines describing the circumstances in which it will grant a waiver of amounts required to be withheld under regulation 105.168 The guidelines state that a waiver will be granted where the applicant (the service provider) is “a non-resident independent individual who earns less than can$5,000 for the current calendar year (including expenses reimbursed or paid on the waiver applicant’s behalf ).”169 In this situation, a waiver may be granted even if the service provider is not resident in a treaty country. A waiver may also be granted where a non-resident person (an individual or a corporation) can demonstrate that the non-resident is exempt from Canadian taxation pursuant to a provision in a tax treaty between Canada and the jurisdiction of residence, and the applicant (service provider) is “a non-resident person whose presence in Canada is not ‘recurring’ and who performs services in Can- ada for less than 180 days under the current contract/engagement” or “a non-resident person whose presence in Canada is ‘recurring’, but whose cumulative presence is less than 240 days during ‘the period’, and less than 180 days under the current contract/ engagement.”170 Presence will be considered to be “recurring” if the non-resident undertakes to perform services for a second or subsequent contract/engagement in Canada within “the period.” “The period” is defined to include the calendar year that the waiver pertains to, the three immediately preceding calendar years, and the three immediately following calendar years.171 There are exceptions to the granting of waivers, even where the non-resident service provider meets one of the preceding tests.172 Where the non-resident has a single contract that grants the individual the right to perform services in Canada in two or more years (including contract renewal rights), a waiver will be denied. Similarly, where there is no multi-year contract but a history of repetitive services performed in the same or similar locations (such as participation in air shows, rodeos, combine

167 Canada Revenue Agency form R105, “Regulation 105 Waiver Application.” 168 Canada Revenue Agency, “Guidelines for Treaty-Based Waivers Involving Regulation 105 Withholding” (online: http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/rndr/trty-RDM.html). For Quebec, waivers from withholding under regulation 1015R8 to the TAQ are based on the absence of a Quebec establishment rather than on treaty exemptions. See supra note 160. 169 Supra note 168 (italics in original). 170 Ibid. (italics in original). 171 Ibid. 172 The exceptions do not apply to applications based on earnings of less than Cdn$5,000 in the particular calendar year. taxation of non-resident artists, athletes, and other service providers n 635 harvesting competitions, etc.) in two or more previous years,173 the waiver will not be granted. Finally, where a treaty deems the non-resident to have a permanent establishment in Canada only if he or she provides particular services for a specified period, the timelines discussed above will be modified to correspond to the particular treaty. For example, many of Canada’s treaties deem a construction site to be a permanent establishment only if it lasts more than 12 months. Furthermore, the deemed permanent establishment rules contained in the fifth protocol to the us treaty (discussed above) will likely affect the availability of waivers in the circumstances contemplated by the new treaty provisions.

Athletes, Actors, and Other Performing Artists There are restrictions on the ability of athletes and performing artists to apply for a regulation 105 waiver. Since Canada’s tax treaties generally preclude athletes and performing artists from claiming a treaty-based exemption from Canadian taxation on the basis of having no permanent establishment in Canada, withholding tax waivers are generally not available for such individuals. However, where the athlete, actor, or entertainer is a resident of the United States for the purposes of the us treaty and earns gross fees in Canada of Cdn$15,000 or less (including expenses reimbursed or paid on the artist’s or athlete’s behalf ) in the particular calendar year, a waiver may be issued. This exception is limited to us residents, since Canada’s other treaties do not contain the $15,000 carve-out. us-resident athletes and performing artists other than actors earning below the $15,000 threshold should apply for a waiver in the same manner as other service providers—that is, by completing and filing form r105. Since withholding for actors occurs, not under regulation 105, but rather under part xiii, actors in this position must file form t1287174 to request a reduction in the amount withheld.

Behind-the-Camera Personnel Special rules apply to persons providing services in Canada in respect of the film and television industry. Non-residents who work behind the scenes in the film and television industry, such as camera operators, lighting experts, and sound technicians, are often in a unique position compared with other non-residents. Specifically, since location shooting is by its nature mobile, there is generally no permanent establishment associated with the production. In addition, non-residents who have experience working on productions filmed in Canada will regularly be hired for other Canadian shoots by different producers. Accordingly, while such persons will usually be exempt

173 Previous years need not be consecutive. 174 Canada Revenue Agency form T1287, “Application by a Non-Resident of Canada (Individual) for a Reduction in the Amount of Non-Resident Tax Required To Be Withheld on Income Earned from Acting in a Film or Video Production.” 636 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 from Canadian taxation by virtue of not working at a permanent establishment, they may fail the recurring presence test generally applicable to non-resident service providers. In recognition of the unique circumstances of behind-the-camera personnel, and in order to avoid discouraging foreign productions (by pursuing what would be considered in Hollywood as a draconian tax policy), the cra has developed special guidelines for these service providers.175 The application for the waiver is made by filing form r107176 with the cra film services unit that serves the location where the services will be provided. According to the cra’s guidelines, a treaty-based waiver will be granted where the following criteria are met:

n the applicant’s presence in Canada under the contract for the particular “project” will be less than 180 days; and n services for the current project and other projects within the “period” are performed in Canada at identifiably different “production sites”; or the current project is not “related” to the other projects; and n services are not “repetitive.”177

The cra defines a “project” to mean a production in Canada of a film or digitally recorded visual production, including a feature film, television movie, television series, episode, documentary, video production, or commercial. Projects are considered to be “related” when the second project continues the services provided as part of the first project and are carried out by the same production company or major studio. The cra also considers projects to be “related” if the services to be performed by the behind-the-scenes personnel are provided under the same contract for services.178 The “period” is the current calendar year, the three immediately preceding calendar years, and the three immediately following calendar years.179 A “production site” is a geographic location in Canada used for a project, determined relative to the industry and type of activity (such as shooting a feature film) under consideration. A production site is not limited to the production office, studio space, or studio lots used by the non-resident, unless all of the production activities occur there. The cra considers the metropolitan area of a city to be a production

175 Canada Revenue Agency, “Withholding Tax Waiver Guidelines for Behind the Scenes (BTS) Personnel in the Film and Television Industry” (online: http://www.cra-arc.gc.ca/tx/nnrsdnts/ film/bts/wvrs/rg105/gdlns-eng.html). 176 Canada Revenue Agency form R107, “Regulation 105 Waiver Application—Film Industry.” 177 Ibid. 178 Ibid. 179 Ibid. taxation of non-resident artists, athletes, and other service providers n 637 site where the activities of the production are performed in various places within that area.180 The cra considers services to be “repetitive” when the behind-the-scenes personnel routinely provide services in Canada in the same geographic location.181

Income and Expense Waivers A non-resident who does not qualify for a treaty-based waiver may submit an application for a reduction of the regulation 105 withholding (an “i & e waiver”) based on a statement of the estimated income and expenses relating to the services to be provided in Canada.182 The i & e waiver process provides that a non-resident person may claim expenses against Canadian-source income, with the net income being subjected to tax at graduated rates, rather than being subject to regulation 105 withholding. If the estimated tax payable, after the application of graduated rates, is lower than the regulation 105 withholding normally required, the non-resident person may benefit from the lower rate. The cra will review the waiver application, consider the reasonableness of the expenses claimed, and determine whether the non-resident qualifies for a reduction of the withholding based on the i & e waiver application. If the application is accepted, security (such as a bank guarantee) equal to the withholding to be waived may be required. Provided that the foregoing conditions are met, the cra will authorize the payer(s) to reduce the regulation 105 withholding accordingly.

Conclusion Foreign service providers are coming to Canada with increasing frequency. It is incumbent on both the non-resident service provider and the local business that engages that person to be cognizant of the intricate rules affecting the taxation of these services. The proper conclusion in any particular circumstance will depend on the interaction of Canadian domestic law and international tax treaties to which Canada is a party. All of the specific legal requirements must then be applied against a panoply of factual variations. These include the categorization of the service provider as dependent (an employee) or independent (a contractor), the length of stay in Canada, the jurisdiction of residence of the foreign worker, the type of industry or the nature of the services provided, and the availability of Canadian administrative relief.

180 Ibid. 181 Ibid. 182 IC 75-6R2, supra note 110, at appendix B. 638 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

Analysis of all of the above-noted circumstances prior to the commencement of the services is essential in order to minimize Canadian tax, reduce administrative compliance, and maximize foreign credits. In particular, the availability of the cra’s withholding tax waivers is dependent on the foreign worker’s providing the cra with sufficient lead time (generally at least 30 days) to make a determination of eligibility for the waiver before the service fees become payable. Actors, entertainers, and behind-the-camera personnel will likely need specialized assistance from tax advisers who have knowledge of the industry and are familiar with the cra procedures that apply to such service providers.